This article first appeared in The Edge Financial Daily on January 30, 2018

KUALA LUMPUR: The Institute for Democracy and Economic Affairs (IDEAS) said the suggestion to lower the interest rate on housing loans by the government would hide the issues faced by the local property market.

The proposal was made last Thursday, the same day that Bank Negara Malaysia (BNM) announced a 25 basis points hike in the overnight policy rate (OPR) to 3.25%.

“Artificial lowering of the interest rate will hide the fact that a speculative wave and a supportive credit policy took place, and will result in further supporting [of] the growth of a market which probably reached its saturation a few years ago and, therefore, now has to experience a readjustment crisis,” said IDEAS senior fellow Dr Carmelo Ferlito in a statement yesterday.

He said the interest rate is a price that communicates the present or future orientation of economic factors, which helps participants coordinate their plans without the need for any central coordinating authority or coercion.

He went on to say that the fixing of interest rates by a monetary authority leads market participants to make the wrong choices.

“The world economy experiences the strange situation where, even in those countries where the central role of prices emerging from the free market forces interplay is understood, one of the key signals for the economic system, the interest rate is centrally fixed by a monetary authority. Such a system easily drives market participants towards wrong choices,” said Ferlito.

He said the best solution to mitigate speculative investment and malinvestment — such as what happened in the Malaysian property market — would be to abolish political power and the central bank’s authority over the interest rate and leave it to market forces.

“Only in this way, investment decisions would be based on a signal consistent with the inter-temporal preferences of market participants,” he said.

Last Thursday, Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi proposed the reduction of interest rates of housing loans to ease the burden of homebuyers, which was discussed at a committee meeting on housing issues.

Ahmad Zahid said the high interest rate was among the reasons behind the 3,605 unsold housing units in the RM250,000 to RM500,000 range last year. Based on a comparative study, he said Malaysia’s interest rates are in the mid range among the developed and developing countries.

Besides the issue of interest rates, the committee also discussed the temporary suspension of new housing projects valued at RM1 million and above, issues surrounding the People’s Housing Project and BNM’s proposal to develop integrated databases and implement centralised initiatives for affordable homes.