1. Interest Rate Hikes
Bank Negara (BNM) has, for the first time since May 2011, revised its Overnight Policy Rate (OPR), raising it from 3% to 3.25% on 10 July 2014. OPR has a causal effect on Base Lending Rate (BLR). Thus, an increase in OPR should cause a corresponding increase in BLR as well (from 6.6% to 6.85% as of the time of writing).
*For more on the relationship between OPR and BLR.
While it is unlikely that BNM chose to hike interest rates for the sole purpose of ‘cooling’ the property market, the effects of each successive interest rate hike will be reflected most by property prices due the highly leveraged property market.
Note: leveraged here refers to the high amounts of debt from mortgage loans.
While the recent interest rate hike is in itself not significant, further hikes should not be ruled out. Each successive hike increases the cost of funds, making it less attractive for risk taking behaviour on borrowed funds.
2. Abolishment of Developer Interest Bearing Scheme (DIBS)
DIBS is an innovative home financing scheme whose original intention was to help lower the cost of buying a home. Under DIBS, interest payments would be borne by the developer during the construction period. However, speculators have taken advantage of this scheme to buy properties with lower capital outlay.
The abolishment of DIBS prevents buyers from avoiding the interest costs, thus increasing the expenditure threshold needed for property speculation. This effectively rules out low to middle income speculators. The downside to this is that houses will become less affordable to the genuine home buyer.
That said, it should be noted that some developers have come up with alternative schemes for buyers to skirt this ban. In fact, Developer Interest Rebate Schemes (DIRS) are already becoming increasingly common. Under DIRS, developers directly write cheques to buyers to reimburse the buyers’ cost of servicing interest.
Overall, the abolishment of DIBS will deter those with insufficient income from speculating by raising the threshold to speculate.
3. Real Property Price Index (RPGT)
As another initiative in cooling down housing prices, government has again raised the RPGT in 2014.
"RPGT is structurally targeting speculators and since it is not an upfront tax, it would not be a deterrent to owner occupiers or investors who buy properties for rental gains. In the long term, it may help to curb to property speculation,” Mah Sing Group Bhd group managing director Tan Sri Leong Hoy Kum said.
RPGT ‘hurts’ the profit for speculators causing a drop in investor’s interest in the secondary or sub-sale market. Long term investors, however, are unlikely to be overly concerned about the duty increase.
The extension of the applicable period (for RPGT rate of 30%) from two years to three years is also seen as a surgical move. As most projects take 2-3 years to complete, under the previous regulations, many speculators were able to "escape" the highest RPGT rate by selling right after project completion. With the extended applicable period, higher tax rates will be applicable to a wider range of speculators.
Some argue that RPGT hikes may cause some upward pressure on prices. This stems from when sellers try to pass on the incremental costs from RPGT to buyers and from when sellers delay selling off their properties, which may cause a temporary drop in supply.
Nonetheless, RPGT is indeed an effective way of curbing speculative demand. Short term investors and speculators are expected to be the biggest losers from the RPGT hike of 2014.
4. Minimum Property Purchase Price for Foreign Investors
The minimum property price for foreigners was raised from RM500k to RM1mil. It is to prevent foreigners from "snapping up" property meant for the lower and middle income groups.
However, it is expected to have minimal impact as foreign investors only make up approximately 7% of Malaysia’s property market. In addition, most properties which attract foreign investment are already worth more than Rm1mil.
5. Maximum 70% Loan-To-Value for 3rd Residential Mortgage Loan Onwards
This policy was implemented in 2010 for housing loans. A person with 2 active housing loans under his name will only be able to get a margin of finance of up to 70% for his 3rd home loan onwards. This increases the cash outlay required to speculate serially in the residential property sector.
However, whether by design or by oversight, due to certain loopholes or allowances, it has not been as effective as it potentially could have been.
Firstly, commercial property mortgages remain unaffected. With many new property launches blurring the lines between commercial and residential type units, savvy borrowers are free to take up commercial property mortgage packages that skirt this limitation.
Additionally, loopholes in individual bank borrowing guidelines are regularly exploited by savvy buyers with the tacit abetment of those within the banking industry.
Finally, this policy does not take into account the number of houses one already has that isn’t mortgaged.
Nonetheless, it has proven effective in increasing the barriers to entry in the secondary housing market, and to a lesser degree, in the primary market.
6. 10 Year Limit on Cash Out Mortgage Refinancing
This policy disproportionately affects asset rich investors / speculators. It severely limits their access to funding based on increasing asset values.
By enforcing this, BNM effectively increases the costs to acquiring higher liquidity (cash) through refinancing. This would reduce the upward pressure on property prices caused by the asset rich segment of society.
7. Increase in Transparency of Property Sales Price
As a marketing strategy, developers may offer rebates and freebies to purchasers, but discreetly include the costs (referring to the rebates and freebies) into the property selling price by articifially inflating the price. This has the effect of distorting actual home prices, and allowing buyers to take a higher loan amount than would have been.
Beginning in 2014, a detailed breakdown of sales prices must be provided by property developers. It should include the value of all benefits and incentives offered to buyers such as exemption of legal fees, stamp duty, sales agreements, cash rebates and free gifts.
On top of that, the margin of finance offered by banks will only depend on the actual value of the unit, leading to the lower loan amount, much like before. This, together with the Loan-To-Value (LTV) curb, will immensely reduce the loanable amount to investors. This could also possibly curb future incentives that will be used to replace DIBS.
By reducing speculative demand, any property price appreciation in future is likely to be due to an increase in house quality and rising construction costs rather than speculation. More so, the continuous increase in demand from the expanding young adult population will continue to place upward pressure on prices.
Overall, short-term players will be most affected by the latest cooling measures, while genuine buyers (owner-occupiers) and long-term players who buy for long-term rent will not be affected as much.
As a measure of speculative demand, the annual growth in the number of borrowers with three or more outstanding housing loans in 2013 has declined substantially to about 4%, from a peak of 15.8% prior to the implementation of the measures. Note that these borrowers account for only 3% of housing loan borrowers. Housing prices have also been rising at a lower rate of 8% in the 1st quarter of 2014 (4th quarter 2013: 9.6%). It is unlikely that prices will decrease but they are likely to stabilize or increase at a slower rate in coming years.