With the rapid increase in property prices in the last five years or so, speculators have been laughing all the way to the bank.
Datuk Dr Goh Ban Lee, The Sun Daily
A popular topic of conversation among friends and relatives is the rapid rise of property prices in the last four years or so. Speculation in property prices is inevitable with private ownership of land. However, traditionally, speculators needed to have deep pockets to carry out their activities on a big scale. As such, speculation in properties was not a common pastime.
The scenario changed with a sales gimmick introduced by a developer in Penang in 2007 when there was a global financial crisis. Fearful that its houses might not be sold, the developer introduced the 5/95 payment scheme whereby buyers paid only 5% of the property price and borrowed 95% from banks.
Making the deals even more attractive, the developer paid the interest for the buyers' loans until the project was completed. Though the project was quickly sold out, the prices of the properties were on the high side compared to nearby projects.
Before the introduction of 5/95 or 10/90 schemes, the common practice was the 30/70 scheme whereby the buyers paid 30% and obtained loans for 70% of the price of the properties.
Many developers have adopted the 5/95 or 10/90 schemes. The term "Developer Interest Bearing Scheme" (DIBS) was thus coined. Eventually, even the legal fees were borne by the developers.
Although the scheme was introduced to attract ordinary house buyers, it inadvertently made it cheap and easy for speculators to earn relatively large profits in property speculation because they only had to pay the initial payment, either 5% or 10% of the price of the property and had two to three years to "flip" them. In DIBS, the speculators found their cash cows.
For example, for a RM1 million property, one needs to pay only RM50,000 if the developer adopts a 5/95 scheme or RM100,000 if it is a 10/90 scheme. A speculator with RM200,000 capital is able to book four or two properties. He or she then has two to three years to sell them.
Even if the prices of the properties were to increase by 20% during the construction period, the speculator would make RM200,000 for each. If it was a 5/95 scheme, the speculator would make a 400% profit, minus the legal fees. If the scheme is 10/90, he or she would make a 200% profit.
There are few businesses or investment opportunities that give such large returns in such a short time. It should be noted that by the time the speculators are looking for buyers, the projects are already visible.
Making things worse, there are developers who hold pre-launch viewing for selected clients. As such, before the public is aware of new projects, selected clients are allowed to choose and book units. By the time the project is shown to the public, choice units have been taken. There is no doubt that many prospective buyers have experienced disappointment when told by sales personnel that the units they want have been booked.
With the rapid increase in property prices in the last five years or so, speculators have been laughing all the way to the bank.
It is strongly believed that the spiral increase in the prices of new properties in the last few years is the result of speculative buying. It has also affected the property market as a whole. As a result, young families with a household income of RM7,000 a month are now shut out of the property market, even if they accept the reality that their dreams of living in a "middle-class" neighbourhood, such as Island Glades in Penang and Taman Tun Dr Ismail are gone and they are willing to live in cheaper areas.
As a general rule, the housing market is not efficient and this has led to fluctuations of house prices. However, with the introduction of DIBS about five years ago, the situation has become worse.
DIBS has been in the news lately, especially in business sections. The consensus of the writers is that the scheme is not good for genuine house buyers and the housing industry. It is also not good for the economy as a whole. Singapore banned it in 2009. Bank Negara should do so as soon as possible.
Datuk Dr Goh Ban Lee is interested in urban governance, housing and urban planning. Comments:letters@thesundaily.com
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