Debate on interest bearing schemes

Is this the best way to help first-time house buyers?

For years, developers rode the wave of brisk sales. Part of it was a vibrant market, and a growing economy.

Credit was easy and abundant and the introduction of the developer interest bearing scheme (DIBS) made it easier to sell houses.

But there was a price to pay. DIBS inflated prices and allowed people to buy houses without paying the usual money upfront during the construction phase.

Fuelling the buying spree, DIBS was a success in terms of sales. What it ultimately did for the industry was to push prices up and make prices unaffordable and as a result of its inflationary-causing mechanism, it was duly banned last year.

The slump in sales has now seen a number of property developers calling for one of their chief arsenal to be re-instated, at least for first-time house buyers.

The irony is that regulators of the economy are now considering re-introducing DIBS after having removed it in Budget 2014.

Under the DIBS system, developers absorb the home loan interest while the property is being built, but the loan will still be disbursed during construction. The scheme was abolished in 2014 because property consultants observed that such schemes, or variants of it, tend to attract speculation as buyers need little or no downpayment. It can hike up property prices by as much as 20%, a developer say.

The debate on DIBS has come up again among property consultants because last week, Minister in the Prime Minister’s department Datuk Seri Abdul Wahid Omar said the Government was considering proposals by property developers to reintroduce DIBS and relax lending guidelines to promote first home ownership.

Wahid was formerly Malayan Banking Bhd group president and CEO before taking up his ministerial position.

There are two things here – the property sector and the lending element. They both need each other.

He said the Real Estate and Housing Developers’ Association has submitted its requests and is in discussions with the Government.

Said Wahid: “We want to promote house ownership, but at the same time we also want to ensure that buyers have the ability to service the loan.”

Does this mean in order to promote house ownership among first-time house buyers, it is all right to inject a bit of speculation with the help of DIBS?

The perspective

Since last year, property developers and consultants have complained that sales are slowing. The general view is that although there is interest, strict lending conditions have made it difficult for buyers to get loans. So today, we have developers eager to sell as high, as fast and as much as possible and first-time house buyers who are eager to buy.

Sitting between them is the abolishment of DIBS and responsible lending guidelines, which developers want relaxed.

Opinions were sought among property consultants but none want to be named except for one. However, they drew parallels between Singapore’s ban on interest bearing schemes, which is equivalent to Malaysia’s DIBS. Singapore’s ban on such schemes were among the first in eight rounds of measures introduced between 2009 and 2014 to bring down prices.

Such schemes remain banned, despite a 66% drop in developers’ sales over a 12-month period from 22,000 non-landed homes in 2013 to 7,300 units sold last year.

The Singapore government is of the view that “prices are not dropping as fast as transactions,” says SLP International Property Consultants Pte Ltd executive director David Neubronner in the city state. “They are unlikely to claw back measures,” he says until prices drop by double digits.

The Malaysian housing market, whether it is targeted at first-time house buyers or any segment of the population, should not be based on the confidence of something that is likely to vanish, says a property consultant. A stable market with steady price rise should be a better goal to aim for, he adds. As for first-time house buyers not being able to buy, the Government is already having various affordable schemes and the Economic Transformation Programme (ETP) which is aimed at increasing household incomes. This is, however, a long term plan, he says.

The fact is, in a sector where a huge proportion of the population buy not to hold, as in a property market, but in the hope that they can sell into profit, such a market is unlikely to be stable or productive, the consultant says.

It would be better for buyers to understand that the properties they own cannot be sold in all and every circumstance and make decisions based on that assumption, he adds.

Overconfidence, therefore, should not be on DIBS or easy credit. Instead, the onus should be to truly make housing affordable instead of just paying lip service to it, he says.

The affordable level is not RM400,000, but somewhere around RM300,000. A report by Khazanah Research Institute released in September this year says the affordable level for Kuala Lumpur in 2014 is about RM280,000, based on three times house-price-to income-ratio. At country level, the median house price is RM242,000 at 4.4 times household/income level.

The rule of thumb is generally between three and four times household income level.

The National House Buyers Association, meanwhile, hopes DIBS remains banned.

Its secretary-general Chang Kim Loong says developers are using DIBS under “a guise of assisting house buyers”.

“Being profit driven, they merely want to sell their products by whatever means,” he says. If developers are sincere in not wanting to shift the risk to house buyers, they should have the Built Then Sell 10:90 concept where buyers pay a 10% downpayment and the rest on completion of the property, he says.

The reality

For about 10 years or longer, people who bought in the outlying areas have difficulties selling off their properties. That feature of the market that used to be a seen in the poorer areas is now seeping into better areas in the secondary market, says a property source.

The owner of a double-storey house in Bukit Jelutong, Shah Alam was asking for RM800,000 for his property. He reduces it to RM750,000. Still no takers.

“It is today’s reasonable price,” says the source.

His message: Ride out the current period and do not tweak the market for a group of buyers, in order to benefit developers.

While the Government’s measures to provide affordable housing would benefit people of whatever groups, what is necessary is for state authorities to reduce the cost of compliance. This will help developers to reduce prices. Right now, different states have different views regarding land matters. There needs to be some form of uniformity.

“By reducing compliance cost, state authorities are making their long-term contribution of reducing house prices and it is important to get this rolling,” the source says.

The role of the government is to govern with prudent and responsible policies. The role of the developers is to deliver quality housing. The role of the authorities in each area is to determine the housing needs of the community.

The introduction of the developer interest bearing scheme was a mistake. The banning of such schemes was the right thing to do. And the contemplation of re-introducing DIBS is a travesty for home buyers, say the consultants. - By Thean Lee Cheng (The Star)