Easy credit spurs home purchases

If numbers were to tell a story, the numbers provided by the National Property Information Centre (Napic) is very telling.

Between January and March of last year, about 750 units of residential units costing slightly more than RM1mil and above exchanged hands. For the first three months of this year, a total of 1,168 units in the same pricing category were sold. That is an increase by more than half in a short span of a year.

With the exception of housing categories between the RM50,000 and RM100,000 range, the six categories between RM100,001 and RM1mil showed an increase in the number of transactions.

Lim Eng Chong, a valuer with property consultancy Henry Butcher, says there are several ways of looking at these rise in transactions.

The first is that Malaysians have become richer and are upgrading to better housing. The second is that housing has become more expensive.

“The confidence level for the latter part of 2008 and early part of 2009 was low. By the end of 2009 and early part of 2010, most economies have turned around and people were willing to put money down on big-ticket items.

“Developers were also more confident and there were more launches. Obviously, income levels have also increased,” says Lim.

It is this strong purchasing power, says RAM Holdings Bhd chief economist Dr Yeah Kim Leng, which has enabled Malaysians to snap up properties as an investment asset. Other supporting factors were low interest and easy credit.

A source from Malayan Banking Bhd says the bank’s mortgage department in one of its Petaling Jaya branches has seen the average amount of housing loans applied for on the increase.

A few years ago, the amount of housing loans at one time were predominantly in the RM100,000 and RM200,000 range. Today, the minimum amount applied for is about RM300,000.

While this trend is not happening across all Maybank branches, to a certain degree, it is an indication that borrowers are increasing their household debt by applying for bigger loans.

“There was a time a few years ago when we have customers applying for loans of RM200,000 and below.

“We don’t see so much of that today. We are seeing applications for RM400,000 and above, because property prices are increasing,” she says, adding that many of the loans in this category are not even for high-end properties.

She defines high-end housing as those priced at RM2mil and above.

Prof Joseph Gyourko, a housing economist from the University of Pennsylvania, says “low real interest rates certainly play a role in determining any asset price, including housing.”

“However, my research indicates that it is not the only, or even dominant force, in the United States. Other forms of easy credit such as low equity downpayment requirements, extension of credit to very risky borrowers who should be renters, not owners, and the like, probably play an important role.

“We are just engaging in research on this in the United States, and do not yet have the answers. I view it as a necessary but not a sufficient condition for a pricing bubble to develop.” he says.

Gyourko says most Asian markets are heavily influenced by China, both indirectly from growth in its huge economy and (in some cases such as Singapore and Hong Kong) capital flows from China into local housing markets. “Whatever you think is going to happen to China pretty much tells you what is going to happen in these other markets. I suspect they will be highly correlated,” he says. He predicts prices in Hong Kong, China and Singaproe will take a hit in the next one to three years.

Both China and Singapore have introduced various measures to cool their property market. In September 2009, the Singapore government tried to coll speculation by abolishing developers’ interest absorption schemes, and followed that with two additional rounds of measures in February and August this year to make it increasingly expensive for speculators to flip properties.

“(The Singapore government) is sending a clear signal to investors that it is going to stop the price boom. The fact that it is doing the third round is a signal that it is going to do whatever it takes,” says Gyourko.

There have been talks in Malaysia that Bank Negara may introduce similar measures.

Gyourko says there must be a political will to deflate bubbles, if there is one. Gyourko, who has been studying China’s property market and been privy to Singapore’s, says shifting a lot of money into property purchases is not permanent or sustainable.

Over-leveraged property buyers may be in danger of defaulting on their loans and that will send property prices down, he says.

Gyourko also questions retirement savings funds (or Malaysia’s equivalent of Employees’ Provident Fund) to be used to pay for homes. “Retirement savings should be kept separate from housing expenditure.”

A source from a property developer says the real problem is banks extending loans to 65 or 70 years old.

“At 40, one is still able to take a 30-year loan. That is the real issue here. At the end of the day, housing is about affordability.

“While the Government may talk about introducing anti-speculation measures, there is another issue that it is not addressing. Does it have schemes which allow ‘genuine buyers’ who want to upgrade to better properties?”

A source from a property developer says he hopes Malaysia will not become a rent culture similar to Britain.

There, young people could not afford to buy their own homes because prices have been driven up so high. The foreigners have bought so much into the British market and whacked up the prices that the locals cannot afford to buy but have to rent.

“I see something similar happening in KLCC area. It is the rich foreigners who will buy these RM3mil to RM4mil condominiums and it will be the locals who will rent from them in years to come.”

By The Star