Don’t circumvent Bank Negara’s ruling

LAST November, Bank Negara introduced a macroprudential measure to curb speculation in the property market. Buyers of third and subsequent properties were required to pay a minimum downpayment of 30% of the purchase price.

Four months into that ruling, Bank Negara's monthly statistical bulletin showed that for four consecutive months since November, the number of loan applications for residential property has reduced. Observers and analysts say a minimum of six months are needed to conclude if this anti-speculation measure is working.

Nevertheless, there is reason to believe that there are property buyers who are trying to negotiate around this ruling with the help of bank officers and agents because they want to pay a downpayment of only 10%.

How widespread this is today is just a matter of conjecture. Bank officers are not likely to confirm this. Banks will also want to lend out as much as possible. Agents will want to protect their own interest as they want to sell as many properties as possible. The same goes for the developers.

There are different ways to circumvent this ruling. The saying, where there's a will, there's a way certainly seems to ring true.

On the part of the buyer, it is learned that some are topping up the difference with a personal or a business loan. Another way to do it is to buy the property with a sibling or to use the name of children who are working. The combination of two salaries results in a larger loan when only one person may be actually paying for the mortgage. The risk, therefore, falls on the borrower who will be responsible for the mortgage.

Group chief economist at RAM Holdings Bhd Dr Yeah Kim Leng says it is possible for bank officers to “structure” loans such as topping up with personal loans to circumvent the 70:30 ruling particularly when they are convinced about the customers' credit profile and repayment ability.

He says such overlending risk is likely to be isolated given that it is detectable through the centralised credit information system used by all banks. Obviously, if the circumvention becomes prevalent, it will dent the effectiveness of Bank Negara's macroprudential measure to curb excessive speculation in the property market. Nevertheless, the banking institutions and the regulators have to be alert against such practices as isolated problems tend to become system-wide when there is excess liquidity and intensifying competition in the loans market, he says.

On the part of the developer, there are also developers who are trying to negotiate around this ruling. Buoyant though the property may be, there are developers of certain segments of the property market who may find it a bit challenging to sell, coupled with the pricing they are asking as well as the location of their projects.

Because their revenue is dependent on sales and because they want to “catch” the market as quickly as possible before the situation turns, they offer a rebate as an enticement. By offering a 20% rebate on the property price, they effectively enable the purchaser to make a downpayment of 10% and have the rest in the form of a 70% loan, which meets Bank Negara's criteria.

In this case, the developer absorbs the loss while the buyer “gains” a 20% discount of the selling price. From the consumer standpoint, this is a better way rather than topping up with a personal or a business loan.

Whichever route a buyer takes, there is some element of risk involved, as with any investment. Globally, we are not out of the woods and on a national that Sarawak election is something to watch. We won't have to wait long, though. On a regional basis, inflation is running high, although Malaysia's inflation rate of 2.9% as of February is considered among the lowest in the region.

A statement by Bank Negara says the 30% downpayment requirement was put in place to curb speculative activity in the property market and to promote the continued affordability of homes for the general public.

The provision of additional financing facilities (such as personal/company loans) together with housing loans as a means to circumvent the loan-to-value ratio limit would be inconsistent with the intended objectives of the measure and is not a practice that the Central Bank considers acceptable.

Bank Negara will continue to monitor the practices of banks closely, and will act against institutions found to be facilitating or encouraging the circumvention of the measure, the statement says.

Assistant news editor Thean Lee Cheng thinks what's yours is yours. No point losing sleep trying to scheme and plan.

By The Star (by Thean Lee Cheng)