A Personal Finance Blog for Malaysian: More deterrent measures to curb unsustainable house price!!??

Monday, January 10, 2011

More deterrent measures to curb unsustainable house price!!??

70% Cap - Limited Effect
HBA argues that more deterrent measures should be imposed to curb unsustainable speculation Posted Date: Dec 09, 2010
‘Unsustainable Speculation’
Prices of Properties, in particular Landed Property has increased substantially over the last 5-years. House prices have really gone up steeply in certain areas. Just to share some trends:

In Kajang, Taman Bukit Mewah a Double Storey Link/ Intermediate 20 X 75 by Metro Kajang was launched in 2004 / 2005 for RM238,900. In 2009 / 2010, the new launch for the same type of Property at the same area was launched at RM327,600, an increase of RM88,700 or 37%. Now, Kajang is considered to be a "Not Hot Area".

In Seri Utama, at Kota Damansara, which is considered to be a "Hot Area", a 22 X 75 intermediate by See Hoy Chan Group was launched in 2004 /2005 at an average price of RM330,000. Today, the average asking price is about RM600,000, an increase of RM270K or 80%.

In Bandar Puteri Puchong by IOI, the average asking price in 2004/2005 for an intermediate DSL was only RM400K. Today, it has gone up to an average RM600K, an increase of RM200K or 50%.

The answer lies in unsustainable speculation fueled by easy credit and low interest rates.
'Unholy Alliance'
The existence of an 'unholy alliance' between certain developers, valuers and certain banks holds true. In an environment of hot demand, the banks work in cahoots with developers assisted by those wayward valuers. Our 'teh tarik syndrome' is also very relevant. When the price of condensed milk increased by 20 sen; the entire cost 'the tarik' increases by 20 sen. Similarly, when the cost of construction increases by 20 per cent, the house price similarly jumps 20 per cent. Greed versus the market environment!

It has always been the Government's aspiration for every citizen to have a roof over their heads and the Government should continue to push this agenda. Genuine house buyers should always have access to affordable financing as more social problems will arise when citizens cannot afford homes.

We had earlier hoped that the Government would announce some stringent measures during the BUDGET 2011 to curb speculation namely:

Percentage of Loan Financing:

For the first house and second house, these genuine buyers should get 90% financing. But for the third and subsequent houses, the margin of Financing should be reduced as these are no longer genuine buyers.

Third house - Margin of Financing should be maximum of 70%

Fourth house - Margin of Financing should be maximum of 60%

Fifth house and thereafter - Margin of Financing should be maximum of 50%

Enhancing the LVR for third and subsequent Housing Loans
The LTV Ratio of 70% for the 3rd- Housing Loan should be further reduced by 10% if the borrower takes any more subsequent housing loans. To illustrate:
Number of Housing Loans                                  LVR
3rd Housing Loan                                                     70%
4th Housing Loan                                                     60%
5th Housing Loan                                                     50%

Reintroduce RPGT scale:

The Government should also consider reintroducing the Real Property
Gains Tax (RPGT) Scale Rate to deter speculative investment in the residential property.  

One time exemption from RPGT should remain as status quo.

Over and above, the exemption above, for two (2) properties, RPGT at current
scale rates should apply, i.e. First Year 30%, Second Year 25%, etc and after Fifth year, no more RPGT. For the Third House; and
Thereafter- Flat RPGT of 30% regardless of how many years the Property was held should be imposed.

To illustrate this formula, HBA proposes the following RPGT Scale Rates which will not be burdensome to genuine house buyers.
Holding Period from Date of Acquisition RPGT Rate on the Gains on Disposal RPGT Rate on the Gains on Disposal
For First 2 Residential Properties For Third and subsequent Residential Properties
2 Years 30% Flat Rate of 30% regardless of Holding Period
3 Years 20%
4 Years 15%
5 Years 5%
> 5 years 0%

No Deterrence for Speculators
The Government should not have a 'one-size-fits-all' policy. They may be painful to some BUT they are for the overall good of the country.

We are glad that the Government heeded our call in regards to the Loan to Value Ratio (LVR) by imposing the 70% LVR capped for third time house buyer. Although it is a good and positive move by Bank Negara Malaysia (BNM), it is insufficient to seriously address the issue of frenzied property price escalation. For those in the speculation business, the 20% reduction in LVR will not really deter them.
Take for example, a RM300K house where 10% down still amounts to only RM30K upon signing SPA. He now has to fork out another RM60K (20% equivalent) but this will be based on the subsequent progressive payments (in a situation of a property under construction), after which the end-financing loan (70%) kicks in. If he can flip the house off at a profit at this stage, he does not need to draw upon his housing loan.
Speculators or maybe 'syndicates' are also cash-rich because of the roll-over system they are using. In other words, whatever profit they earned from the previous house, they put into the new house, thus the 30% up-front is not a major deterrent factor. Those who buy en-bloc may feel the heat but when collaborating with their 'friendly' developers/ builders; terms and conditions may be 'cushioned off'.

The policy is also unclear as to whether the 3rd loan applies to those who are currently enjoying two (2) other current loans OR whether his previous loans, which he had already settled are also taken into account. 
Overall, we feel that this interim measure of capping 70% LVR for third time house buyers may not have the desired impact and may see limited deterrent effect in curbing speculators. Perhaps, BNM merely wants to 'test the water' with this interim imposition. The greater impact would be the RPGT thing that we have proposed. We sincerely hope that BNM would relook the impact.
HBA's next endeavour is to work towards making houses affordable for middle income households and having price controls for this range of buyers. HBA has urged the Government to set up a Special Task Force with such an objective and aspiration.
The National House Buyers Association (HBA) is a voluntary, non-governmental organization manned by unpaid volunteers. For more information, check out their website at http://www.hba.org.my E-Mail: info@hba.org.my

 No. 31, Level 3, Jalan Barat, Off Jalan Imbi, 55100, Kuala Lumpur
Tel: 03-2142 2225 | 012- 334 5676 | Fax: 03-22601803
Email: info@hba.org.my | Web Site: www.hba.org.my

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