A cautionary tale on fair-weather liquidity

There are mixed views about the re-introduction of developer interest bearing scheme (DIBS) among property consultants and the National House Buyers Association (HBA).

The overall concern is the speculative element such schemes will engender and how such a policy will impact the overall housing market. The secondary concern is the social element involving commitment and responsibility.

Will first-time house buyers be able to pay mortgage loans when the three-year honeymoon period ends?

If relaxing funding is the way to go for first-time house buyers, will banks back them up in bad times?

Fair-weather liquidity may not be what this group needs. The importance of commitment by both parties, the buyer and the bank, is. As for the developer, his commitment is to deliver the property. It is the house buyer and the bank who bear the greater risk. In a nutshell, that was the main takeaway from those polled.

National House Buyers Association secretary-general Chang Kim Loong cautions against so-called “zero entry cost” properties whereby the buyer does not need to make any downpayment as it encourages unnecessary speculation.

He advises renting instead if they cannot raise the initial downpayment/commitment fee for an affordable housing unit.

“Do not think that just because it is affordable housing category, one is eligible for a 100% loan (in this case 90% margin). Buyers must understand that it means taking out a back-breaking loan of 30 years and ‘slaving’ for the bank.

“They must understand their obligation to repay the monthly loan without fail and to regularly pay the maintenance and sinking fund as well as utility charges.

“If buyers could not afford to commit with their own funds (ie downpayment), he or she is strongly advised to rent instead. From the onset, buyers must know their legal obligations and moral responsibilities. There is a vast difference between buying and renting.

“If they don’t keep up with the monthly instalments to the bank, the bank will foreclose and the family gets evicted. It is only then that many realise that buying a house can be a nightmare. They will instead be house poorer,” he says.

False Impression

While real estate professionals want to see a robust market, property consultancy VPC Alliance director James Wong says schemes where the initial outlay is minimal tends to give a false impression of the property market.

“Developers absorb the interest during the construction period and the buyers fork out very little of the initial outlay. It is this element which tends to create speculation in the market. With the slowdown in the market, developers will naturally want to return to it.

“The Government has to be very careful whether this will impact the market before it re-introduces it,” he says, although he is for its return.

If it is re-introduced, purchases must be capped at RM500,000, he says.

The debate for or against such schemes should be viewed from hindsight and a historical perspective that is not too far back in the past, nor too distant from today. DIBS, and variants of it, were introduced in the first quarter of 2009, the same year Singapore banned it.

In a little while, the market will see the impact and effect of DIBS, if these have not already manifested in the form of weak rental and owners unable to flip.

PPC International Sdn Bhd CEO Siva Shanker says the problem starts when the properties are completed. DIBS comes to an end, the housing loan kicks in, and the buyer will now have to start servicing his loan.

Siva says a flood of properties bought on such schemes and easy credit in 2012, 2013 and 2014 will be entering the market in 2016 and 2017. Some are completed this year.

He expects pressure on rent for between two and three years as a result of this flood of properties because owners, unable to sell, will be forced to rent them out at lower rental. Nevertheless, he is of the view that DIBS should be brought back for those buying affordable homes.

Low Yield

Incidentally, there is already a current weakness in the Malaysian market with rental yield at 1%-2% for landed units.

There should be a minimum 3% net yield for landed terraces and at least 3%-5% for high rise and bungalows, says a source who declines to be named.

Others who are more vocal about keeping the current status quo urge the Government to stay the course despite a slow market and not tweak policies which have already been set in place if it seriously wants to bring prices down to realistic levels.

Declining to be named, one of them says that despite the wish to empower first-time house buyers, this group simply cannot afford houses that cost RM600,000 and above. The idea should, therefore, be to bring down the pricing to be consistent with household income.

“There is one view that household income is low, that it is not the fault of house prices being high. But we cannot increase our income levels unless the economic growth improves,” the source says.

This is where the Economic Transformation Plan (ETP) comes in. While ETP takes its time to work, for now, the goal should be to get prices in line with household income.

The current set of cooling measures are not that cumbersome nor severe, he says.

“The various measures introduced to keep prices down and to weed out speculation are nowhere as severe compared to those instituted by Singapore to structurally bring down house prices.

“We have made a big dent taking away speculation but we have not succeeded in bringing down prices to affordable levels,” he says.

A Gamble

Whoever proposed to bring back DIBS so that people with little money can buy houses should think of the bigger picture. The houses will be completed and those sucked into this gamble will have to pay eventually. Have household incomes risen sufficiently to enable them to afford to pay three years later?” he asks.

The source concludes that the reason for this debate is partly due to the introduction of DIBS in 2009, the same year it was banned in Singapore.

“When it was banned in 2014, the damage was already done and we will see the full outcome of that damage next year and in 2017. We saw a bit of it this year. Also, the ringgit has shrunk. Coupled with the proposed reintroduction of DIBS will only make the pain all the greater some time in the future. And this will impact upon the future group of first-time house buyers.

“The problem about such delusional analysis – DIBS to help first-time buyers – is that things tend to look fine in the short term but not the long term. There is a need to focus on risks because there will be avenues for abuse,” he says.

CH Williams Talhar and Wong managing director Foo Gee Jen maintains his stand against DIBS. “For me, it is not a step forward but a step backward. There may be irresponsible parties taking advantage and hiking up prices because of this policy. Instead, a grant given by the Government to first-time house buyers would be a better choice as this would prevent a hike in house prices,” he says.

“I take a stand against DIBS,” he says.

There has to be consistency of policy over a period of time. It is this consistency what will bring about a greater good over the longer term. - By The Star

No comments