Nov 13, 2010
THE rising prices of houses is still one of the hot topics among average Malaysians as the threat of higher inflation is growing by the day.
The fact that Bank Negara had early this month imposed a lower loan-to-value ratio (LVR) for those taking up their third and subsequent mortgage loan shows the central bank also considers the situation quite worrying.
Effective from Nov 3, house buyers who have already signed up for two mortgages and are applying for their third loan will only be eligible to get financing of up to 70% of the value of their house. Although it is largely seen as a timely pre-emptive measure to avert unhealthy speculative activities, some quarters voiced their reservation that the measure is too mild and are asking for “stiffer” measures to rein in rising prices.
Their argument is that people who can afford the higher downpayment for their property purchases will not be affected by the lower LVR although the measure may be effective on those who need financing assistance.
The LVR should be further reduced for those applying for subsequent loans. Those applying for their fourth loan should only be granted up to 60% and fifth loan up to 50%, and so forth.
Since the LVR is now used as the basis to decide on the quantum of mortgage loan that house buyers can sign up for, some properties with “unrealistic” price tags are finding it hard to get financing unless their values are adjusted accordingly.
Hopefully, this situation will make developers uphold their responsibility properly and price their project according to the fair value of the property. Just because there is strong demand for landed houses these days, developers should not take advantage of the situation by pricing their property a few notches higher and burden buyers unnecessarily.
Like some parts of the Klang Valley, the situation is also quite apparent in Penang where basic intermediate terraced houses are being priced close to or beyond RM1mil each.
With house prices shooting off the roof, banks should also play a more responsible role and should not over-push their housing loans. The “war” between banks is still evident with some banks trying to outdo their competitors by offering “aggressive” interest rates of up to 2.5% below base lending rate. In fact, banks are still aggressively pushing their credit facilities to consumers.
Although the market situation may still seem to be under control, it is important for all stakeholders to be vigilant and take note of a fast changing signs of overheating.
Like one observer says: “Bank Negara’s LVR curb is not just about the restriction per se, but more importantly it is about the SIGNAL that Bank Negara has send out, and that is, the central bank is keeping a wary eye on things and more measures could be introduced if the market does become frothy.” Hence, the psychological impact of such a move is more important in that it will remind developers, potential borrowers, and bankers to be more judicious with their actions, and that is good for the market in the long run.
Otherwise, the central bank may have to impose further tightening measures if the market heats up further. In fact, various Asian governments are already looking to impose capital controls to curb growing risk of asset bubbles in the region, signalling that the red flag has been raised on the havoc that can be wreaked by the inflow of hot foreign money into the region.
The measures underscore concerns over the US Federal Reserve’s second quantitative easing (QE2) – the printing of money to buy US$600bil long-term government bonds – amid an ‘’extended period’’ of super-low interest rates to support its weak economy.
The side-effect of depressing the US dollar and keeping borrowing costs near zero will cause speculative capital inflow to Asia as investors seek higher yields in emerging markets.
Hence, the environment is highly conducive for asset prices to spiral further leading to asset bubbles. Besides the high liquidity in the system, the low interest rates and inflow of foreign funds are bound to send asset prices soaring if left unchecked.
And when these hot money pulls out, it will result in financial destability and a meltdown in the assets market. Even without the threat posed by these hot-money, governments in Singapore, China and Hong Kong have already imposed a number of restrictions to dampen the rise in property prices and curtail speculative activities in the property sector. So it won’t come as a surprise if Malaysia also have to resort to more restrictions to ensure the financial and property markets continue to be sustainable.