This article first appeared in Capital, The Edge Malaysia Weekly on July 9, 2018 - July 15, 2018

HOUSING and Local Government Minister Zuraida Kamaruddin last week announced that the ministry was working with Bank Negara Malaysia to ease housing loan requirements, in a bid to reduce the number of unsold completed residential units in the country.

She said the central bank is preparing guidelines to allow the relaxation of lending schemes.

“Current unsold units are mainly due to location, accessibility, loan approval and the high cost of buying houses. Last week, we had meetings with the central bank, banks, the Employees Provident Fund and the Ministry of Finance,” she was quoted as saying.

Prudent lending policies by banks are commonly blamed for weak property sales. This has prompted some developers, which have the financial muscle, to come up with innovative financing schemes for homebuyers who do not manage to obtain the financing they need from the bank.

However, property sector analysts contacted by The Edge point out that lending requirements are already quite lenient as prospective buyers, especially first-time homebuyers, are eligible for loans of up to 90% of the value of the property.

“There isn’t much room for housing loan requirements to be eased further, at least not without raising the risk to our banking system. The end-financing mechanisms are already present. It is just about executing the end-financing products better,” says Lee Meng Horng, a property analyst with Hong Leong Investment Bank.

Currently, prospective buyers are allowed end-financing of up to 90% of the value of the units they plan to buy, subject to Bank Negara guidelines. For instance, the homebuyer should not have a debt burden of more than 70% of his or her monthly income.

Meanwhile, those who are buying a third property or more cannot receive the maximum loan-to-value ratio, with Bank Negara’s prudent lending guidelines allowing only a 70% loan margin.

Another property analyst believes that it might be time to consider easing the prudent lending guidelines — which were initially aimed at curbing speculation and cooling an overheated property market — in view of the high rate of loan rejections for homebuyers, given a lower margin of finance.

Loong Chee Wei, senior associate director of Affin Hwang Capital, says lending guidelines should strike a balance between encouraging more people to buy property and ensuring that banks’ asset quality is not affected by more defaults.

“Basically, banks are the best parties to determine the eligibility of loan applications,” he tells The Edge, adding that the highest number of rejections is among loan applicants from the low and middle-income groups because of their low income levels.

“Property affordability is a question of income level, which the government cannot quickly resolve, unless it is considering a higher cross subsidisation between the high-end and the low to mid-range markets,” he adds.

In a February report, Bank Negara says local property prices are “seriously unaffordable”, especially in Kuala Lumpur, Petaling Jaya, George Town and Johor Baru.

Based on the Median Multiple method, the ratio of the median house price to the median household income has consistently exceeded three times, the maximum level for affordable house prices, since 2004.

The median income in 2016 was RM5,228 a month, or RM62,736 a year. Based on this income level, to be considered affordable in Malaysia, the maximum price should be RM282,000 a unit, says Bank Negara.

Maximum affordable house prices are estimated using the Housing Cost Burden (HCB) approach, which states that a house is deemed affordable if housing costs do not exceed 30% of net monthly income.

In 2016, however, the actual median house price was RM313,000. George Town has the most unaffordable housing market, with the median house price at RM600,000, while it should have a maximum affordable house price of only RM294,000, based on the HCB approach.

While the announcement by the minister of Housing and Local Government that house lending requirements would be eased should be good news for property players, Hong Leong Investment Bank’s Lee says it will be up to the banks how they manage their risk.

“Bank Negara can ease housing loan requirements, but at the end of the day, it is up to the banks [and their] risk appetite. Every bank has its own risk management [policies], how much it would like to be exposed to the property market. If [a bank is] already reaching its cap (of credit exposure to the property market), it will shut the tap,” he says.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.