Is curbing DIBS a solution?

Much focus has been placed on curbing the rising prices of properties but will it be a
cause for concern when it comes to the country’s economic growth? Given the slower-than-expected growth in the country’s economy in the first quarter of 2013, some concerns were raised should the measures become a drag to economic performance, especially when the global economy is shaky and the country’s economy is driven by domestic demand.

Malaysia’s gross domestic product (GDP) growth in the first quarter was lower at 4.1% compared with 5.1% in the corresponding period last year. The pace of growth was the lowest since the third quarter of 2009.

AmBank Group chief economist Anthony Dass tellsStarBizWeek that measures to curb property prices from accelerating significantly may have some impact on domestic demand and economic growth, but they will not be significant to impact the overall economic growth.

He says stronger property prices in the short term could strengthen investment and consumption
spending, giving a positive impact on domestic demand.

“However, in the long term the impact of property prices becomes neutral on domestic demand and
economic growth.

“Our view is that focusing on the property market as a policy tool should be more for short-term macro-economic management.

“Over-stimulating the property market may not effectively contribute to economic growth,” he
explains.

RAM Holdings Bhd group chief economist Dr Yeah Kim Lengsays that the potential curbs on the
Developer Interest-Bearing Scheme (DIBS) will only moderate property sales.

“Sales include a large proportion of purchases for investment purposes, they will not dampen
private consumption significantly,” he notes.

Housing and utilities, on average account for only 22% of household spending according to the
2009/2010 Household Expenditure Survey by the Statistics Department.

Some industry observers say that some sort of measures by the central bank to cool property prices and contain the rise in the household debt that currently stands at 80.2% of GDP are most welcome.

Yeah says: “Although the overall statistics show that household assets are still a multiple of household debt, we should still remain vigilant and not allow excessive growth especially if it is fuelled by imprudent lending or driven by sub-prime loans to vulnerable segments of the population.”

He opines that the house price increases over the past several years continue to exceed the average income growth particularly for the lower and middle-income groups.

“Such prudential measures to curtail speculative buying are welcome to prevent unsustainable and unjustifiable increases in property prices as well as to ensure that the overvalued property market does not wreak havoc on the economy should there be a sharp correction,” he adds.

Industry observers suggest that the hike in the property prices have been mainly driven by the market fundamental of supply and demand as well as other related costs such as building materials and land prices.


A win-win solution?

Dass says the country’s economy growth is mainly driven by investment, hence some measures to
curb property prices will not cause some downside risks to the economy.

He says the potential move to curb DIBS could help to reduce speculative activities in the property market so that prices are reflective of market forces.

“There would be some correction in property prices, however the impact could be temporary.

“This is good, at least it helps to re-balance the focus in the economy rather than being over-dependent on a sector and it helps to curb an asset bubble,” he says.

According to Kenanga Research, the DIBS does not affect banking liquidity, hence the impact would only be a knee-jerk reaction.

It says the impact of a loan-to-value (LTV) ratio of 70% on individuals with more than two housing loans and the change in mortgage assessments from gross to net pay have resulted in cooling property demand.

It says that measures such as the incremental real property gains tax (RPGT) hikes seen over the past two years had resulted in temporary correction before rebounding.

It was recently reported that the central bank had highlighted in its 2012 Financial Stability and Payment Systems Reportthat ever since the imposition of the LTV, the annual growth in lending to such individuals had declined sharply to 14.5% y-o-y in November 2010 to 1.9%
y-o-y in December 2012.

On the proposed property tax on foreign buyers in Johor,Kenanga Research points out that higher property taxes on foreigners would not dampen demand, as Johor properties are much cheaper than those in Singapore.

“We believe the measure is good for the long-term sustainability in demand as the influx of foreign buyers could cause sharp spikes in asset inflation, especially when foreign buyers from Singapore have an advantage on foreign exchange, which could lead to a property bubble,”
it says.

Kenanga Research, in a report, says that there is a concern that more fiscal tightening measures on the property sector such as higher RPGT could surface in Budget 2014.

Real Estate and Housing Developers Association (Rehda)president Datuk Seri Michael Yam
tells StarBizWeek that property prices have always been driven by market forces.

He says that there is inadequate supply of residential properties especially in the Klang Valley and Penang. He adds that there are five factors influencing property prices namely building materials, land prices, labour, compliance and interest costs.

CIMB Research, in a report, says supply growth in residential properties in Malaysia in 2012 was only 1.6% – the lowest in 10 years.

“We believe the cause of strong price increases in recent years is mainly due to supply constraints as opposed to excessive demand.

“In fact, any move by the authorities to curb speculation may have the unintended effect of slowing down supply growth, which would in turn exacerbate price increases over the longer term,” the research house says.

Alliance Research analyst Cheah King Yoong expects the move to impose curbs on the DIBS to only
impact the industry loan growth in 2014.

“We believe that the ongoing speculation of the DIBS removal could accelerate property transactions in the near term, which could temporarily drive the demand for mortgage loans,” he says in a report. - The Star

Bank Negara takes measures to avoid excessive household indebtedness (Update)

KUALA LUMPUR: Bank Negara Malaysia announced on Friday a set of measures aimed at curbing excessive household debts and to reinforce responsible lending practices by key credit providers. 

The measures, which take effect immediately, complements the earlier measures introduced since 2010, and include:

a) maximum tenure of 10 years for financing extended for personal use;
b) a maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties; and 
c) a prohibition on offering pre-approved personal financing products.

The financing tenure will only apply to loan applications submitted after Friday (July 5, 2013).  

Bank Negara said the move was because household debts had continued to increase at a strong pace, averaging at an annual rate of 12% over the recent five years. 

“While this has been supported by positive income and employment conditions, in the more recent period, there has been a growing trend in offering financial products that are not in the long-term interest of consumers. This includes extended financing tenures of up to 45 years for house financing and 25 years for personal financing,” it noted.

While this may reduce the monthly repayments, the practice increases the overall debt burden of households in the long run, it said. 

These measures are issued pursuant to section 31(1)(a) of the Central Bank of Malaysia Act 2009 and apply to all financial institutions regulated by Bank Negara Malaysia, credit cooperatives regulated by the Suruhanjaya Koperasi Malaysia, Malaysia Building Society Bhd and AEON Credit Service (M) Bhd. 

It said the key credit providers must observe prudent debt service ratios in their credit assessment to ensure households are protected from rising costs and unexpected adverse events. However, households who have the financial capacity to take on borrowings will continue to enjoy access to financing. - The Star

New rules for property buyers

PETALING JAYA: Property buyers will no longer have the option to take loans for longer than 35 years. Anyone taking a personal loan can now only do so for a period of up to 10 years.

These are new rules set by Bank Negara with the aim of helping to reduce household debt in the country.

Before the new caps, property buyers could take loans for up to 45 years, while personal loans could be paid back over a period of up to 25 years.

Bank Negara is acting because Malaysia’s household-debt-to-Gross Domestic Product (GDP) ratio is a high 83%. It is the highest in emerging Asia.

The stricter lending guidelines also saw the central bank prohibiting the offering of pre-approved personal financing products.

These new measures to tackle household debt will also be extended to all financial institutions and credit cooperatives regulated by Bank Negara, the Malaysia Co-operative Societies Commission, Malaysia Building Society Bhd, and Aeon Credit Service (M) Bhd.

All these institutions will also need to follow responsible lending limits. New borrowers, especially those with lower incomes, can only take on debt amounting to 60% of their monthly take home pay.

The new limits will not affect loan applications made before yesterday.

Bank Negara governor Tan Sri Zeti Akhtar Aziz, in a briefing yesterday, said the household debt was not yet at an alarming level, but based on present trends it would eventually be so.

Extremely long property loan periods “encourage excessive debt accumulation by households and increases the vulnerability of this (the household) sector,” she said.

Industry players said the measures would have a limited impact on the property market because the older generation of Malaysians had already bought into the property cycle.

They said the latest caps would mainly affect the younger generation.

“They are the ones who will need loans with the extra tenure, not the older generation who are mainly able to afford (higher monthly repayments),” said IOI Properties’ director Teh Chin Guan.

“In the short term, the level of affordability for the younger generation will be lower at today’s prices,” he added.

Elvin Fernandez, managing director at property consultant Khong & Jaafar, said these moves by the central bank should be applauded because property loans with a tenure of more than 40 years was not advisable.

Real Estate and Housing Developers’ Association of Malaysia president Datuk Seri Michael K.C. Yam believed the measures were a “good pre-emptive move because Malaysians are not very disciplined when it comes to these matters”.

“In other countries the maximum tenure is usually 25 years or until the person reaches the retirement age of 55,” he added.

Federation of Malaysian Consumers Associations president Datuk Marimuthu Nadason also supported the new measures.

“But I urge Bank Negara to work with civil societies like us on financial literacy education, which Malaysians sorely lack,” he said, pointing out that 51 people were declared bankrupt daily in the country.

Korisatan Karu­ppiah, Penang Consumers Protection Asso­ciation president, said borrowers should be allowed to repay their loans ahead of schedule, without penalty.

“The lenders argue that they have already made plans with your money over the tenure you agreed with, and that paying back the sum early affects their plans,” he said.

He said the penalty was a fine, of between RM10,000 and RM35,000, depending on the size of the loan. - The Star

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Banning DIBS long overdue

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

Mortgage loans on the rise

Observers say people are buying while DIBS is still in force

By YVONNE TAN

PETALING JAYA: The speculation on the removal of the Developer Interest-Bearing Scheme (DIBS) could accelerate property transactions in the near-term, temporarily driving the demand for mortgage loans.

“People may be quick to take advantage while the scheme is still in force and buy properties, which may then cause a spike of sorts in loan demand in the period just before the scheme is removed,” Alliance Research banking analystCheah King Yoong said.

Any removal of the DIBS by Bank Negara is expected to only impact the industry loan growth beginning next year rather than this year, Cheah added in a note to clients.

It is unclear when the removal of the scheme will take place but industry observers are expecting it to be very soon.

As for property firms, Cheah said he expected them to “adapt” to the curb on DIBS by offering “other incentives” to ensure that demand for property does not drop.

These could come in the form of rebates to property buyers, said another analyst who concurred with Cheah’s views.

The DIBS in recent times has become an easy financing package offered by property developers in joint-promotion activities with banks.

Under the scheme, buyers need not fork out much initial payments to buy properties, as the developer supposedly absorbs the initial interest. The buyer only starts paying the instalments after his property is ready.

A high number of buyers buy into this scheme with the intention of flipping the property when they gain possession of it, making a profit without having to fork out much of their own money for it.

In the case of a removal of the DIBS, consumers would then have to absorb the initial costs, including interest payments, even before their properties are ready.

DIBS is mainly offered to buyers of the high-rise residential segment, where property flipping is reportedly the most rampant.

Assuming the DIBS is curbed, Maybank Investment Bank Research estimates that the worst-case scenario would be a marginal 0.7-percentage point shave off its 2014 industry loan growth forecast of 10.5% to 9.8%.

“We believe domestic banks have been more tempered in their exposure to the mortgage segment, and channel checks point to limited exposure at this stage.”

It is maintaining its industry loan and earnings forecasts for the individual banks for now. In his report, Cheah raised his 2013 industry loan growth target to 10.5% from 7% to 9% premised on the expectations that loan growth momentum would pick up in the second half, mainly driven by the accelerated disbursements of Economic Transformation Programme-related loans, even as general election-related risks dissipate.

He has not set any loans growth target for next year. - The Star

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Nusmetro targets RM1b lock-in sales

NUSMETRO Group is targeting RM1 billion worth of lock-in sales by the third quarter of this year.

Its managing director Thomas Chan said the targeted sales would be made through its four Arte series projects in Selangor, Kuala Lumpur and Penang.

He said the two ongoing projects in Selangor and Kuala Lumpur - Arte @Subang West and Arte @Kuchai Lama - are already sold out.

The latest introduction in the series, Arte S in Bukit Gambir here, has already sold 40 per cent of its 400 condominium units, Chan said, with another 30 per cent sales targeted within the month.

"We would have sold 70 per cent of the Arte S units here by next month ... and we managed to sell 40 per cent during Chinese New Year in February.

"We hope to reach the RM1 billion sales target. 

"I do not think many developers have managed to do so, unlike the big players like SP Setia," he said at the official launch of the Arte S project last Saturday.

Arte S, a project of about RM430 million in gross development value (GDV), is the property developer's first Arte series project in the nor-thern region. Construction is expected to begin next month and be completed by the end of 2016.

The project features two condominium towers of spiralling architectural lines; iconic indoor and outdoor pods that house a three-storey entertainment lounge; a garden with hanging cocoons; a gym; and a multi-layered pool.

The project is designed by Spark, the internationally-acclaimed London-based architecture and ur-ban design firm, which also designed Singapore's Clark Quay and the Shanghai Cruise Terminal in China.

Chan said Spark's design for Arte S has been shortlisted for the World Architecture Festival (WAF) 2013 in Singapore this October under the Future Projects Award.

"Spark has also worked on designing many other projects, but it chose Arte S to enter the competition at the world's largest architectural festival this year," he said.

Chan said Nusmetro did not previously develop projects in series until it introduced the Arte series two years ago.

"We never had that kind of branding but this is something we need to do to develop projects for a niche market," he said.

Projects in the Arte series, he explained, evolved around the art subject and sought to give a different definition to lifestyle living.

"When people look at the projects, and how they are designed externally and internally, what they think about them is subjective.

"However, our Arte series projects have received encouraging market endorsement," he said.

Nusmetro's fourth Arte project, named Arte+, is a mixed-development project with small-office home-office suites off Jalan Ampang in Kuala Lumpur.

Chan said the project will be officially launched to the public in November or December this year, after it is unveiled to the company's partners in September. - Business Times

Rehda: Engage industry players on future of DIBS

PETALING JAYA: Bank Negara should seek feedback from industry players and stakeholders before implementing any measures to curb or ban the developer interest bearing scheme (DIBS), said Real Estate and Housing Developers Association Malaysia (Rehda) president Datuk Seri Michael Yam. 

“I hope Bank Negara would engage us fairly quickly so we can tell them what the situation is really like,” said Yam, who opposes the curbing of DIBS. 

It was reported that Bank Negara is currently studying the risks posed by DIBS and there is a possibility that it may impose curbs on the scheme. 

Under DIBS, buyers only need to make the initial downpayment on the property they wish to buy, while the developers absorb the initial interest until the property is handed over to the buyer. 

Yam explained that DIBS was meant to assist people who are renting and wish to buy a home and those who are upgrading.

“Without DIBS, they would have to service two loans at the same time, or if they are renting, pay the rent and the loan, too,” he said. 

On DIBS allegedly being open to abuse, he said there were only isolated cases of such abuse. 

“I don’t believe developers will push prices up by 20% to 30% just because DIBS is part of the package. The banks do their own internal valuation and risk management, so they would be asking questions if they think developers are pushing the price up. 

“There are already measures put in place to mitigate some of the possible abuse,” he said. Yam argued that banks too participate in the DIBS scheme, which would have to be sanctioned by Bank Negara. 

“Banks are required to submit an invoice and inform the buyers how much interest he or she needs to pay. At all times, the buyer is aware of the amount of interest the developer is bearing. 

“The developers are prepared to do so because the interest cost during the construction phase is very minimal,” he said. 

“Buying a house is such a big investment; smart consumers would and should check the prices of properties in  surrounding developments to see if the price they are paying is more or less the same.” 

As for allegations that DIBS helps to fuel speculation, Yam said speculation only happens in developments in prime locations with short supply. 

“Not everyone takes up DIBS, which is actually implemented by very few developers and offered in very few developments. Such developments tend to be higher end products in urban areas. The rising prices of properties are mostly caused by factors such as inflation, and higher cost of materials and land.” 

A spokesman from Mah Sing Group Bhd said before Bank Negara takes any move to impose curbs on DIBS, it should first take into consideration the industry feedback and current market conditions.  

“We cannot comment too much as there has been no announcement, but generally the lending environment is still conducive. Financing liquidity is still attractive, interest rates are still low due to the competitive mortgage space where banks are offering a BLR [base lending rate] of minus 2.4%, from BLR minus 2.1% to 2.2% a year ago.”

C H Williams Talhar & Wong Sdn Bhd’s managing director Foo Gee Jen, however, believes that some measures should be put in place where DIBS is concerned. 

“It doesn’t need to be a total ban but what I’d advocate is to educate the public on what DIBS is about and how it works,” he said. 

“There’s a perception that DIBS is a very easy payment scheme where the buyers just need to pay a downpayment of 5% to 10% and nothing else until their homes are completed. Most buyers are not aware that in terms of price, they are actually paying between 15% and 25% more with DIBS. 

“The interest cost has already been factored into the property price. DIBS makes it easier in the sense that there is breathing space of two to three years where the buyer doesn’t have to pay anything. DIBS also encourages speculation.”


This article first appeared in The Edge Financial Daily, on June 28, 2013.