Cooling Measures

How far have we succeeded in curbing speculations and stablising prices?

Ask anyone on the street randomly, chances are most people will think that the skyrocketing home prices have brought more harm rather than benefit, both to our nation as a whole as well as at the individual level. With the aim of curbing speculations and stablising prices, the Government has implemented various cooling measures beginning the year 2013. Detractors claimed that it would achieve exactly the opposite effect because speculators would mark up prices further to cover their higher cost. Few years down the road, let’s examine the impacts of cooling measures, and whether more can be done to help the working class in realising home ownership.

Joining the conversation today are three experts in the field, namely Tang Chee Meng, chief operating officer of Henry Butcher Real Estate Sdn Bhd; Asst. Prof. Dr. Yip Chee Yin, from the Department of Economics, Faculty of Business and Finance, University Tunku Abdul Rahman (UTAR) Kampar who specialises in the study of housing market; as well as Dr. Ong Kian Leong (Dr. OngKL), financial educator and the creator of GoFinance™, a tool that allows investor to evaluate if an investment is worth investing.

Tang begins by listing down the cooling measures that have been in force so far:

1. Reintroduction of Real Property Gain Tax (RPGT) and the top tier tax rate raised to 30% for disposals within first 3 years;
2. 70% cap on Loan-to-Value (LTV) ratio for third property loan onwards;
3. Loan eligibility computation based on nett instead of gross income;
4. Loan tenure limited to max 35 years;
5. Prohibition of Developer Interest Bearing Scheme (DIBS);
6. Greater transparency, nett price to be disclosed & financing to be based on nett price;
7. Responsible lending policy by banks;
8. Increased minimum price threshold for foreigners to RM1 million nationwide, RM 2 million for Selangor (zones 1 and 2) and for Penang Island (landed properties).

Tang believes that these measures, especially the computation of loan eligibility based on nett income, coupled with more stringent processing criteria adopted by the banks, have contributed significantly to reduce the amount of speculation in the market. He stated that, “The impact is clearly reflected in the decline in the volume of residential transactions recorded from 2013 onwards, and the drop in the overall value of residential transactions from 2015 onwards, as evidenced by Figures 1 and 2. The residential property market is currently sluggish, with some developers deferring new launches and revising their sales targets downwards.”

Dr. Yip adds that, “The frenzy buying of houses has caused the perception that the property industry was in a ‘bubble’ which would pop very soon if not controlled, thus cooling measures were needed to avoid the deterioration into a full blown asset bubble.”

Showing the findings obtained from an ongoing study by a UTAR research team, Dr. Yip elaborates that, “Figure 3 reveals that the last 2 historical boom-burst episodes in the 1990s in the Malaysian property market, and also the latest run-up in property prices during the period of 2009 – 2013. The turn-around in 2013 is an indirect verification of the aggregate effect of the cooling measures. Whereas Figure 4 traces the volatility of the price dynamics over the same period, corresponding with the rise and fall of price changes in Figure 1.”

However, Dr. Yip admits that the countervailing actions have some negative impact on market confidence, “Financing has become an issue in the property market with the tightening of criteria for mortgage credit.  According to some industry players, the current failure rate for home loan application is 40% – 60%, drastically affecting sales in the primary market as well as the secondary (sub-sale) market.”

“As shown by analysis of the two graphs, the cooling measures have worked well. Nowadays you will see more people buying for own occupancy rather than for speculative investment. Speculators have retreated from the market. Nevertheless, these anti-volatility actions though effective have slowed down sales and dampened the housing industry which is considered one of the main driver for economic growth.”

Concurring with the views, Dr. OngKL says, “The cooling measures have successfully curbed speculative activities among middle to high end new developments (i.e. residential properties above RM400,000), particularly in Kuala Lumpur, Selangor, and Johor Bahru metropolitan areas. Figures from the Valuation and Property Services Department (JPPH), Ministry of Finance clearly show that both the volume and value of property transactions have slowed down after 2013.”

“The effect is exceptionally prominent among new high-end condominiums especially those above RM500,000. For example, the market share of new-launched condominiums sold above RM500,000 has dropped from 41% (of all newly-launched property sold) in the first half of 2015 to 7% in the first half of 2016. This happened mainly because high-end condominiums are the most preferred type of property among property flippers.” 

RESPONDING TO MARKET NEEDS

So the experts agreed that the cooling measures have worked. If that is the case, have they been effective in correcting the mismatch between supply and demand? Is it really easier for genuine homebuyers or upgraders to buy a home now, in what the industry players called a “Buyers’ market”?

Tang delightedly confirms such an assumption, asserting that, “Yes, the measures have managed to curb speculative activities, and those who are still buying homes are mainly buying for their own occupancy or for long term investment. Genuine homebuyers are being aggressively wooed with a host of freebies and easy payment schemes by property developers, whilst in the secondary market, property sellers are more prepared to negotiate on price in order to sell their property.”

Dr. OngKL also affirms such a finding, saying that, “From what I have observed, while developers have reduced launches of high-end condominiums, new launches of middle-end residential properties, especially those priced between RM100,000 to RM300,000 have increased significantly. As such, homebuyers or upgraders who are well prepared with enough savings can find more affordable choices now. However, for those who need to finance their purchase of home, they may find it tougher as loan rejection rate is higher than few years back.”

Dr. Yip who also recognises the validity of this view, shares that, “I would think that developers have adapted and responded well to the market needs. Observing property sales advertisements of developers, generally the main themes are affordability as well as accessibility and connectivity infrastructures, further enhanced by neighborhood amenities that appeal to contemporary lifestyle.”  

However, Dr. Yip would like to highlight the dilemma faced by many loan applicants. “The observed drop in dispersal of home loans reminds us that homeowner hopefuls still have problem getting mortgage credit from banks which emphasise on the loan repayment capability of the potential borrowers. In addition, there are the few hundred thousands of PTPTN defaulters who are blacklisted and hence have no access to housing loan. Hence, the authorities certainly can do more to put in more effective measures to assist the 2 groups mentioned above.”

FACILITATING HOME OWNERSHIP

Since we have reached such a finding, it is only natural for us to ask if more should be done in helping the working class to own a home?

As an experienced industry insider, Tan is very clear on this, saying that, “Cooling measures only help to curb speculation and prevent property prices from going up too high and too rapidly. The government still needs to put in place policies to encourage private developers to embark on building more affordable homes besides building more affordable homes under PR1MA and other initiatives.”

Great minds think alike, so we found. Dr. Yip of UTAR also feels the same. “The cooling measures are not sufficient in helping the working class to own a home. The basic problem is affordability. In the short term, the government should provide more land for affordable housing, accompanied with infrastructural development to provide accessibility to drive the potential for economic activities in the immediate surrounding. This will ensure that these affordable housing projects are liveable with growth potential for the residents. In the long term, the government should draw up more effective policies to accelerate economic growth to improve household income. The bottom line is for the government to restore and increase the confidence of both investors and consumers.”

Agreeing with such a finding, Dr. Ong KL lists down some practical measures to take:

1. Strictly restrict new residential properties to first and second time home buyers only. Genuine home buyers can avoid competing with investors / speculators in housing market. For example, Singapore has been implementing this scheme in their public housing policy, to successfully increase home ownership rate to above 90% since 1990s.
2. Introduce tax benefits to developers who build affordable homes, to encourage more participation of private sector in affordable housing.
3. Penalise developers for units unsold 3 to 5 years after launching, in order to encourage responsible building and demand-targeted supply, and to minimise waste of resources, funds and land. Developers will be motivated to reduce price of these unsold units rather than paying hefty fine that adds to their holding costs. In fact, his is another successful scheme implemented by Singapore to regulate private housing supply. 

WHAT ABOUT WEALTH ACCUMULATION?

A more stable price should benefit us all. Yet in today’s society, the property is the single most important asset for wealth accumulation for many families. Therefore we would like to seek the comment of the experts, whether the cooling measures will halt the growth of family wealth?

Tang is of the opinion that the adverse impact is minimal. “To a certain extent yes, if these measures prevent them from buying a property. However, the basic rationale for the cooling measures is to prevent home prices from going up too high too rapidly so in that sense, the cooling measures are intended to help genuine homebuyers to own their own home at prices that they can still afford. They can still get maximum loan when they buy a second property for investment purposes.”

In this aspect, Dr. Yip is not worried at all. “The value of a property depends on a number of factors such as location, infrastructure, security and prospect for future growth of the neighborhood.  The public perception that properties are assets to be passed on to children, the local demographics and social trend for homeownership will keep raising the demand. The cooling measures will check price volatility and transaction volume which means a slower rate of appreciation of the property value, but not a halt to the growth of family wealth.”

Dr. OngKL is quite confident that the harm is negligible, as he states that, “Cooling measures won’t halt the growth of their wealth in long term, since the fundamental housing demand is growing with the growth of population and number of households!”

GETTING A BIT TOO COLD?

Since we agree that the cooling measures have functioned well, shall we relax these cooling measures to stimulate the soft market, like some market players have advocated for?

Tang of Henry Butcher is open to the idea, saying that, “As the market has softened considerably, it is perhaps time for the government to review the situation and relax some of those measures which affect genuine homebuyers but still keeping those which have a deterrent effect on speculators. For example, keeping the 70% Loan-to-Value (LTV) ratio for the third property, but allowing Developer Interest Bearing Scheme (DIBS) for first time homebuyers for houses priced at RM 500,000 and below. The minimum price threshold for foreigners should also be retained.”

While Dr. Yip does not oppose to the relaxing of these cooling measures per se, he stresses that it should be done cautiously. “Relaxing these cooling measures in order to stimulate the soft market is a good thing but it can bring in devastating consequences if not properly executed. The lifting of control may offer banks greater freedom in competition, which could result in compromise on the criteria for loan approval and easy availability of mortgage.  This will bring back speculative investment and tremendous demand pressure. The result could be unsustainable price expansion, resulting in the formation and collapse of the asset bubble, the damaging effects of which have been well documented in recent history.”

“So instead of relaxing cooling measures across the market, the government should have more comprehensive monitoring of market development and provide assistance for homeownership to the specific groups facing affordability problem.  To assist developers, the government perhaps could look into lowering of compliance and land conversion costs as well as improving the mechanism for development project approval.  Both the industry players and the government should work closely to strike a balance for sustainable growth of the housing market.”

Dr. OngKL also advocates for a more prudent approach, as many among us are not ready yet. To sum it up, he says, “These cooling measures should only be relaxed progressively, after more effective measures to boost home ownership rate are in place.”

Now that we are assured that the cooling measures won’t hurt wealth accumulation nor the industries, another concern would be whether the slowdown in construction sector will reduce the multiplying effect, subsequently triggers a larger economic downturn? Again, the experts shared their insights.

Dr. Yip thinks that the possibility is real, but the risk is manageable. He elaborated by saying that, “When such a scenario takes place, it will be accompanied by a fall in market confidence of both business and consumers, resulting in curtailed spending. We should expect prices to dip or stagnant. With little or no margin, developers will pull back implementation of new projects and there will be consolidation in the industry where the weaker and less efficient players will be weeded out.  It is unlikely the market will go into free fall as the government will and need to step in with measures to stimulate the market and restore confidence to both developers and consumers.”

Tang is more optimistic, as in he does not expect the economy to be hit badly, and argues that there are many things the government can do to improve the situation. He explains that, “The construction sector is only one of the many components of Malaysia’s economy and a slowdown in the sector may not necessarily trigger an economic downturn, if the other sectors like manufacturing or agriculture can produce a higher contribution to the economy. Nevertheless, if the economy does slow down, it will of course have a negative impact on the property market as there will be an increased sense of uncertainty over job security and a more cautious attitude towards making a heavy financial commitment like buying a property.”

Thinking that there is nothing much to worry about, Dr. OngKL answers with a witty remark, “In history, slowdown in construction is never a cause, but an effect of economic downturn.”

AN EQUITABLE DEVELOPMENT

Last but not least, since some have claimed that the soft market would hurt economic growth, we would like to know that for the development to be more equitable, which should actually be our priority. To cool the rising prices, or to stimulate the soft market?

Tang preferred to handle the issues one by one, thus he advocated that, “When the market shows signs of overheating within a short period of time, the priority of the government should be to implement policies to cool the market and rein in galloping property prices. However, the government should monitor the market closely and when the price increases have normalised to a sustainable level, the government should change track and implement measures to stimulate the market to prevent a market crash.”

Dr. Yip believes that we must act carefully in juggling the different policy objectives. “We need to strike a balance to cool the rising prices and stimulate the soft market. Which is the optimum point of balance is unknown yet not only in the practical world, but also in academia. Thus the best solution is to monitor the demographical factor, income level, interest rate, economic growth rate, house index and rental index, so that we can have the real situation of the housing market at first hand. I believe we can do that, because there are real and true data in the Inland Revenue Board (IRB), National Registration Department (NRD) and the Department of Labour (JTK).”

For Dr. OngKL, the priority is undoubtedly clear. “Increasing home ownership rate should always be the priority of the government, to ensure that the development will be more equitable to all, because family is the most important corner stone of the nation!”

It goes without saying that to allow the general population to unleash their potential and maximise their contribution to the society, the government plays a significant role in ensuring a healthy environment where the people’s wellbeing and basic needs are well taken care of first. With efficient implementation of sound policies, we can look forward to a more equitable society where the fruits of development is enjoyed by all.