The State of the Nation: Cooling measures beginning to bite

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STEPS taken by both the government and Bank Negara Malaysia over the last few years to rein in household debt and cool the property market have begun to show results.

Since the 2008/09 global financial crisis until early this year, the housing market had a good run, causing concerns that a price bubble was building up.

Among the policies implemented to curb prices since 2011 are a 70% loan-to-value ratio restriction on a buyer’s third home purchase, abolition of the developer interest bearing scheme and capping of loan tenures to a maximum of 35 years. Measures in Budget 2014 included increasing the threshold of foreign purchases to RM1 million and raising the Real Property Gains Tax to a maximum of 30%.

Property market outlook
There are now signs of a slowdown in the property market. The Malaysian House Price Index, released by the Valuation and Property Services Department, rose 8% in 1Q2014 compared with 9.6% in 4Q2013 — the lowest since 4Q2010.

There was also a decline in the number of residential properties transacted in the major cities of Malaysia. Kuala Lumpur and Selangor saw a double-digit quarter-on-quarter decline in 1Q2014, down 15.7% and 13.4% respectively.

In Kuala Lumpur, 60% of the properties transacted were below RM500,000 while the remaining 40% were RM500,000 and above. The slowdown is occurring at all price levels, led by a 27% q-o-q drop in residential property transactions in the price range of RM50,000 to RM200,000.

Industry observers say the decline is also due to a lack of properties in the RM50,000 to RM200,000 range, due to price appreciation, and buyers wanting to purchase better-quality homes.

The situation is slightly different in other states, such as Johor and Penang, where most properties transacted are below RM500,000. In Johor, the overall 6.8% q-o-q slowdown in residential properties was mainly in properties with a valuation of RM200,000 and below. Interestingly, the number of properties worth RM1 million and above transacted in 1Q2014 jumped 33.2% q-o-q to 289 units.

Industry observers also note fewer new launches due to lower take-up rates in some areas.

In a recent report, Affin Investment Bank cites three key reasons for the slowdown in the first half of this year: weaker market sentiments, developers holding back launches and a high base effect.

According to the Residential, Shops and Industrial Properties Market Status Report 1Q2014 released by the Valuation and Property Services Department, 6,339 new housing units were launched in 1Q2014, down 49.7% from 12,598 units in 4Q2013 and 64.5% from 17,836 units in 1Q2013.

Affin says pre-sale launches in the first half of the year were flattish to weaker, ranging from 3% to a negative 23%.

Developers will only launch a project officially when the take-up rate has reached a certain level. “They will start with a soft launch to test the market. If the response is not as good as anticipated, they will delay the official launch,” says an industry observer. There could be delay in the rolling out of new property developments as they are highly dependent on market demand to get off the ground.

The take-up rate is also affected by weaker demand and more stringent lending rules, say analysts. Some homebuyers who had paid the booking fee were not able to complete the transaction after signing the sale and purchase agreement due to their inability to secure mortgage financing, says an analyst.

Meanwhile, Bank Negara data shows that the total value of loans applied to purchase residential properties slid 5.6% to RM128.4 billion in the first seven months of 2014 from

RM136.1 billion in the previous corresponding period.

Loans approved by banks saw flattish growth — RM68.4 billion in the same period compared with RM67.7 billion previously.

Moving forward, most developers are either neutral or pessimistic about the property market’s prospects, although some expect a pick-up with buyers making last-minute purchases before the implementation of the Goods and Services Tax (GST) on April 1, 2015.

The Property Industry Survey 1H2014 released by the Real Estate and Housing Developers’ Association shows the level of optimism about the property market’s outlook has fallen. Only 20% of the respondents were optimistic about the outlook for the second half of 2014 and this fell further to 13% for the first half of 2015. Meanwhile, 41% of the developers were pessimistic about the sector’s outlook in the first half of 2015, up from 33%.

The slowdown, though, is not expected to lead to big falls in property prices. These depend on both demand factors, such as the number of buyers and the level of disposable income, and supply factors, such as the cost of construction and land, labour and building materials. When the demand side is weaker due to the government’s efforts to cool the market, developers can either sell their properties at a lower price or hold on to their projects until the market is ready to accept properties at a desired price level again.

The likelihood is a delay in launches to protect margins. Although developers’ margins held up well at around 18.7% in the first half of 2014, analysts see a decline going forward.

This is given that the price of land remains high, coupled with rising cost of materials due to an inflationary environment and the implementation of GST. This leaves the developers with no other option but to delay launches. In fact, an analyst with a local research house points out that most reputable developers are willing to wait for the right time to sell their properties rather than been impacted by margin compression in the short term.

Will the property market slowdown impact GDP growth?
In the first half of the year, the construction sector grew 14.5%, driven mainly by the construction of residential and non-residential properties. In the first quarter, the sector grew 18.9%, before moderating to 9.9% in the second quarter. In 2013, it grew 9.7% while residential property development rose 15.5% and non-residential 15.5%, according to the Department of Statistics.

Moving forward, will the slowdown in the property market hurt growth?

A point to note is that the construction sector contributed 3.8% to gross domestic product (GDP) in 2013 compared with 55% by the services sector.

Economists generally agree that the impact of the current downturn in the property market will not be significant in the short term, but if it becomes pronounced and drags on, there will be an impact.

Lim Chee Sing, chief economist at RHB Research, explains why. “In the short term, the impact will be cushioned by ongoing activities in infrastructure construction, like the MRT Line 1 and the various expressways. Furthermore, MRT Line 2 is yet to be rolled out but is pending announcement.”

Julia Goh, economist at CIMB Research, says sales are expected to rebound as developers adjust their pricing strategy and timing of launches. This, she explains, should prevent a major slowdown in the sector in the short to medium terms.

An analyst with a local investment bank believes that even if there was a delay in property construction, there would not be a big impact on GDP. “This is because construction activities accounted for less than 5% of GDP in the second quarter of 2014 and property development accounts for less than half of all construction activity,” he explains.

However, if persistent, there will be an impact, given that a large portion of private investment (on the demand side of GDP) is in property, says RHB Research’s Lim.

Be that as it may, economists say Bank Negara will not want to tighten further as GDP growth in the second half is expected to slow down. Lim says signs of a slowdown are already discernable, particularly in industrial production, consumption and exports.

Furthermore, the macro-prudential measures implemented thus far are beginning to have an impact, as reflected in the flattish growth in loan approvals.

In a July 11 report, Kenanga Research says a 25 basis point hike would increase a homebuyer’s monthly instalment commitment by 3%. “In our worst-case scenario of rate hikes of up to 100bps over the next 12 months, monthly instalments will increase by 12%, which will have a significant impact.”

Any rate hike will still increase Malaysia’s household debt burden, say economists. This is because the country’s household debt-to-disposable income ratio is 140%, one of the highest in the world, ahead of the US (123%) and Singapore (105%). Moreover, according to Bank Negara, household debt has been increasing at an average rate of 12% over the last five years, reaching 86.8% of GDP last year.

Thus, economists generally do not worry about “over-tightening” by Bank Negara, noting that the central bank has thus far managed monetary policy well. Nor do they see Bank Negara easing some of the measures implemented, given that household debt remains at a high level.

Lee Heng Guie, an independent economist who was formerly with CIMB Research, believes the government is unlikely to introduce more punitive measures as that would further dampen the already negative property market sentiments.

“The focus should be on ensuring affordable housing for targeted groups. A holistic affordable housing programme is needed to close the gap between the demand for and supply of such properties. Drawing on lessons from international approaches to housing policy and practice, there are three broad routes to affordable housing — rental assistance, homeownership assistance and regulatory policies.”



This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.