Don’t back down from cooling measures

The chorus from developers seems to be getting louder. Warnings of higher prices and the inability of homebuyers to buy homes have been blamed on rising raw material costs, the upcoming goods and services tax and the prudential measures instituted by the central bank.

The timing of complaints to get the housing market moving again is surely more than coincidental. With less than a month to go until Budget 2015 is tabled in parliament, the grouses of developers are akin to lobbying the Government to make changes to previous measures.

For one, some have asked for the developer interest-bearing scheme (DIBS) to be reinstated. As more launches see fewer houses being taken up, developers are left with unsold units.

The solution seems to be to reinstate the DIBS, which was instrumental in moving large quantities of houses when the scheme was legal.

To allow the DIBS to come back would be foolish. There is a reason why the DIBS has been outlawed in a number of countries. It just fuels speculation.

Speculation was a chief reason why house prices surged after the Global Financial Crisis in 2008. Coupled with cheap money with interest rates dropping, people realised that the housing market was a safe place to park their money for quick returns.

Housing is a steady investment, and when you can get cheap money with little upfront payment to realise quick profits from an asset that is affordable and relatively risk-free by Malaysian standards, it was a no-brainer.

The rise in house prices since the crisis has been phenomenal. This encouraged more development of houses, and with a mechanism such as the DIBS available to move the stock of housing, prices just kept going up.

The reason now why houses cannot be sold as frequently as before is also down to Bank Negara taking a hard stance on the approval of housing loans. We have heard stories of people having multiple property loans, property clubs and bulk purchasers of houses. As a result, affordability requirements were instituted to make sure people could afford the houses they were buying without making too drastic sacrifices to the money needed to live decently.

The result is that more people are finding it difficult to get a housing loan. And that means expensive houses are not moving and developers are sitting on a growing pile of unsold stock.

The problem is not to grease the wheels again. Household debt, which housing accounts for much of, really took off after the Global Financial Crisis.

With household debt to gross domestic product surging and now a concern for the central bank, any calls to relax approval mechanisms have to be dismissed.

The option is for developers to sell the unsold stock at cheaper prices. It’s not like they cannot afford it. Many are making good money and the land cost for many of the high-priced projects is pretty low by current levels. Prices can be dropped without taking a big hit.

After all, the reason why prudential measures for loans were instated was to protect homebuyers and the economy. The evidence of the effects of a housing bubble bursting is all too well-documented and nobody wants to go through that again.

Developers have got some wins though. The build-then-sell policy, which was supposed to take place from next year onwards, is no longer the preferred method of selling houses.

It will now exist parallel with the old sell-and-build scheme, and no special prizes for thinking which one just about every developer will go for.

There are other reasons why the current measures should remain. Some will say maybe the screw should be tightened further.

Look at Singapore. Measures to cool the property sector have resulted in the slowdown of the sector. Sure, developers there are complaining, but have the measures benefited the country and the general population? The answer is yes.

Home prices have fallen and so have rentals. It’s still expensive to buy a house down south, but without the intervention by the Government to cool the market, the situation would have led to bigger catastrophes down the road.

At the end of the day, it is about the greater good. It’s not always about profit. - By Jagdev Singh Sidhu (The Star)

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