This article first appeared in The Edge Malaysia Weekly on October 21, 2019 - October 27, 2019

THE property market, on its own, is estimated to contribute 3% to the country’s gross domestic product (GDP). However, inclusive of its spillover effect, the contribution to the Malaysian economy is as much as 14%.

This is because each time a property is bought, it is likely to involve financing from banks. A purchaser may also get mortgage-reducing term assurance or takaful to obtain better financing rates from the banks.

Next, a homeowner is likely to buy fire insurance to protect his or her property. Then, there is, of course, the purchase of furniture and electrical appliances as well as renovation charges, which will contribute to the economy. And don’t forget the legal fees.

Before anything else, there is the contribution of the property market to the construction sector.

According to the Construction Industry Development Board, the residential sector contributed RM15.4 billion or 38.4% to the value of private-sector construction jobs in the first half of the year.

All in all, the property market, together with its spillover effects, is estimated to contribute 14% to the country’s GDP, which makes it a significant and strategic industry. This is why successive governments have made it a priority to ensure the health of the sector.

Apart from the construction industry, the financial sector would be impacted the most by any developments in the property sector. Looking at the property market at the moment, should we be worried about the banks?

According to KAF Seagroatt & Campbell Securities, property-related mortgages constitute 47% of total gross loans. Residential mortgages account for 33.9% of total gross loans while non-residential mortgages make up the rest.

This shows that exposure of the banking system to the property market is fairly high. However, to be fair, these include older mortgages, which are of lower valuations.

Based on the research house’s calculations, using data from the banks and Bank Negara Malaysia, newer property loans — those given out in the last four years — make up 22% of the residential segment, or 7% of the total industry gross mortgages.

“We think this is the subsegment that is likely to see some downward adjustment in collateral value, given that newer batches of properties were likely sold at higher prices in the last four years,” says Rachel Huang, KAF Seagroatt & Campbell’s analyst for the banking sector, in a report in June.

While it has been four months since the report was released, the situation of the property market can be said to have remained the same, if not worse. The only difference between then and now is that the government has come up with some measures to support the property market next year.

Under Budget 2020, the government has proposed to lower the threshold for foreign ownership of high-rise properties in urban areas to RM600,000 from RM1 million, introduce a rent-to-own scheme with financing of RM10 billion and change the base year for real property gains tax (RPGT) to 2013, from 2000.

Nevertheless, these measures are unlikely to have any significant impact on the property sector, says Izzul Hakim Abdul Molob, another analyst from KAF Seagroatt & Campbell, in the firm’s Budget 2020 strategy report dated Oct 11.

“The impact on lower foreign ownership threshold would be minimal. This is because overhang high-rise units that are priced above RM600,000 only made up 11.1% of the 114,437 overhang units.

“The number is even lower if it is only limited to the Klang Valley, that is, 6% of the overall overhang units. In our view, the base year revision for the RPGT is irrelevant. This is because given the current overhang in the property market, [it is] unlikely that property prices will appreciate,” says Izzul Hakim.

However, other proposals like Malaysians@Work will provide further support to the current stable employment level, he says. The low unemployment rate of between 3% and 3.4% in recent years has been supporting the property market.

With all these numbers in mind, will further deterioration in the property market lead to a system-wide crash of the financial sector? An analyst with an international research house says that it will.

“The short answer is yes, but not so much due to mortgages alone since the loan-to-value ratio is about 80% ... meaning that banks can still take a 20% decline in house prices,” says the analyst, who declined to be named.

This means that it will require more than defaults in residential mortgages to trigger a crash in the financial system.

According to Real Estate and Housing Developers’ Association president Datuk Soam Heng Choon, the biggest concern is that when the interest rate is high, inflation and unemployment are also high, and all these factors will cause a property market crash.

“If that happens, the impact can be very serious. If property prices drop substantially and remain low for a long time, the banks might need to impair their loans. The risk is more to the banks than the buyers,” Soam tells The Edge.

“Unlike margin accounts, the banks cannot ask homebuyers to top up. From a buyer’s perspective, as long as you still have a job and are able to service your loan, you will be fine.”

Assuming an impaired loan ratio of 20% and a 20% to 25% decline in property prices, KAF Seagroatt & Campbell estimates sector credit costs to jump to 50 basis points from 35 bps.

The banks that could be the most affected are AMMB Holdings Bhd, with a possible 31% downgrade in fair value to RM3.40 per share, and RHB Bank Bhd, with a possible 32% drop in fair value to RM3.80, says Huang in the June 17 report.

“The least affected would be Alliance Bank Malaysia Bhd (no change to fair value), and this is mainly because it had turned away essentially from the property sector in the last few years. The impact on the other banks’ fair values is downgrades of between 6% and 17% on average,” she adds.

Her latest target prices for AMMB, RHB Bank and Alliance Bank are RM4.20, RM5.10 and RM3.30 respectively.

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