House buyers still being hoodwinked?

FOR many years, the National House Buyers Association (HBA) has been sounding alarm bells that prices of houses are getting more and more unaffordable for the average rakyat, especially the lower and middle income segment.

Based on current starting salaries of about RM3,000 per month and with prices of new launches of apartments in the Klang Valley being priced in excess of RM500,000, it is almost impossible for our younger generation and single parents to own their own homes.

Unless strong measures are taken by the Government to address the issue of steep rise in house prices, Malaysia risk facing a “homeless generation” that can cause various social issues with far reaching complication.

HBA had previously expressed its gratitude and thanks when the Prime Minister introduced stronger measures in Budget 2014 to address rising house prices such as increasing the Real Property Gains Tax and higher threshold for foreigners to buy properties and banning of the Developer Interest Bearing Scheme (DIBS).

Among the rules introduced in Budget 2014 was increased transparency in property sales price, where property developers will have to display detailed sales price including all benefits and incentives offered to buyers such as exemption of legal fees, stamp duty, sales agreements, cash rebates and free gifts.

This was supplemented by a ruling by Bank Negara that the margin of financing given by banks should be based on the net selling price, which is the sales and purchase agreement (SPA) price less any benefits, incentives and rebates given by the developer.

It has been seven months since Budget 2014 was announced and recently HBA volunteers went to various property fairs of various reputable developers to survey whether how well some of the measures announced in the budget have been implemented.

Freebies

(a) DIBS – Save for just one small developer, all projects surveyed had no DIBS, which shows that its ban had been successfully implemented.

(b) Free legal fees for SPA – All projects surveyed offered the fees if the SPA signed with their panel lawyers.

(c) Free legal fees for loan agreements – Only about half of projects surveyed offered these fees provided it was taken with their selected financiers and financiers’ lawyers.

(d) Free stamp duties for memorandum of transfer (MOT) – Only about 20% of projects surveyed offered the free MOT.

Rebates

All the projects surveyed offered rebates ranging from 5% to 10% of the SPA price, meaning that the purchaser only needed to pay about 5% down payment instead of the customary 10%. There were numerous projects which offered 10% rebate, meaning that the purchaser just needed to apply for 90% financing from the panel banks. Coupled with freebies such as free legal fees for SPA and loan agreement, the purchaser effectively did not need to fork out any cash up-front to purchase the house.

Findings

The conclusion is that developers are cutting down on their so-called freebies. Previously almost all projects surveyed offered free legal fees for SPA and loan agreement. As for the rebates, our survey suggested that the practice had actually intensified compared to previous years. In the past, many developers used DIBS where buyers paid 10% and nothing nothing until the property is completed. However, this has now turned into “pay nothing and get your property.”

Bank sales staff were also present during sales launches. The banks offered 90% margin of financing based on the SPA price and not the net selling price which is SPA price less all the freebies and rebates.

Conclusion

HBA supports transparency in the selling price and that the margin of financing be based on the net selling price as there is no “free lunch” in this world. Whenever the developer says free legal fees, stamp duty etc, the developer will factor the cost of such freebies and rebates back into the selling price of the property.

Although, it would appear that it makes it easier for people to buy properties without the need to fork out huge cash up-front, such freebies and rebates artificially pushes up the house price even further and has spill over effects, pushing up prices of existing properties and its surrounding locations further, making it more difficult for the future generation to buy properties.

The biggest challenge faced by prospective house buyers is coming up with the 10% down payment and other expenses which can cost in excess of RM70,000 and above for a RM500,000 property. Our younger generation who are struggling to make a living will not have enough savings and even for those fresh into the workforce, the funds in their EPF Account 2 is also not sufficient.

However, jacking up house prices and then offering a 10% rebate is not the solution. In the long run, it will only exacerbate the situation. Once a property price has risen to an artificially high level, it is difficult to bring it down again without negative consequences to the owners and economy at large.

Using the example of a ‘big’ developer who was offering 10% rebates and freebies such as free legal fees on SPA and loan agreement, the said property were all launched in excess of RM700,000 when the true value after rebates and freebies is closer to just RM600,000. Would it not be better to launch the said property at RM600,000 and asking buyers to pay the required 10% down payment instead of artificially hiking up to RM700,000 and then hoodwinking house buyers by giving rebates and freebies?

If the developer launches the project at RM700,000, then the next launch must even be priced higher, probably closer to RM800,000 and soon, even link homes as far as Semenyih will be priced in excess of RM1mil. Then surely, a “homeless generation” will emerge in Malaysia.

In the long run, it is better if the developer prices the property lower without the cost of the freebies and rebates and house buyers can then plan and budget their purchase accordingly and need not have to pay so much in monthly loan instalments.

Prospective house buyers must save up for their future purchase the moment they start working and forgo certain luxuries such as electronic gadgets and non-national cars.

The goals of affordable housing cannot be achieved overnight and requires the cooperation and understanding of all stakeholders.

Chang Kim Loong is HBA secretary-general. - The Star