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Implications Of A Developer Being A Loan Provider

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Minister of Urban Well Being, Housing and Local Government, Y.B. Tan Sri Haji Noh Bin Omar, recently created ripples albeit shock waves within the housing developers market with his ‘out of the box suggestion’ when he proposed that housing developers be given the additional option [plan B] of being accorded money lenders license under the Moneylenders Act 1951 (Amendment 2011), and also the Pawn Brokers Act 1972 to provide loans to prospective buyers.

There were varied reactions from stakeholders as a bagful of ’woe views’ in lieu of the naysayers going to town with their concerns as to how needy buyers would be compromised over the basic essential of the proverbial- ‘roof over the head contention’, whilst loans would balloon unreasonably albeit diminish disposable incomes of the borrowers ie a situation of perpetual debt.

The authorities in an attempt to quell the furore relented and requested the stakeholders to engage in more in-depth discussions before the ‘green light’ was given in the form of a go ahead with the alternative financing strategy to be probably touted as a Plan B Housing Financial Option.

A SWOT strategist encouraged ‘deeper soul searching’ as to the fundamental root cause and addressing the financing quagmire from that perspective in terms of policy and the like, instead of adding on layers of sweeteners without correcting the ‘fundamental flaws’ of the equation which would eventually lead to a bubble with its dire circumstances as corrective cycles have shown.

Amongst the fundamental flaws were:

  • The writings on the wall were already there with a quick study of transaction records vis a vis transaction values for the various asset classes spread over a six-year period as per the table below [NAPIC 2015]
  • The chart clearly indicates that there was a complete mismatch of prices and values as developers in their quest to boost sales adopted many strategies that boosted speculation and ‘paper profit’ whilst they merrily constructed concrete in designs that appealed to the emotional senses of the investors [rather than genuine homeowners] and allowing rational sense to prevail.
  • The key equation missing was the astute understanding albeit justification of price vs value   in the acquisition cost, as brick and mortar took on pricing mechanisms that defied construction cost.
  • The absence of a coordinated housing policy that actually brooks zero nonsense in according approvals, coordinating in a balanced town planning rules/regulations albeit plot ratio / densities with matching infrastructure’, drainage, parking and alternative transport connectivity was sorely missing in lieu of development being with the individual state’s authority.
  • This missing link saw similar products being replicated on a mass basis beyond the markets capacity to absorb leading obviously to a glut situation.
  • Property Guru’s minus their turbans and beards purported the virtues of good debt vs bad debt but no one ever broached the topic of ugly debt in the event of a market correction.
  • As the position stands, Malaysia has the highest household debt ratio in relation to the GDP, in Asia lending credence to swaying away from inch perfect conformity to acting otherwise and towing the line as the re definitely is no short cut to this equation of development. Rome was not built in a day, and with this “mismatch of stock” firmly entrenched in the equation, bankruptcies and defaults are going to be the order of the day for more than a little while whilst Rome burns and the exclusive Nero’s fiddle their fiddles oblivious to the reality on the ground (no bread, eat cake retort). We are basically reaping what we have sowed from an ‘uncoordinated national housing policy’ whose role is to have a helicopter policy applicable “across the nation”.

In any economy, the financial indicators are based on a whole slew of fundamentals, perceptions, rule of law, equitable justice and most importantly the “gearing ratio” of loans to deposit with minimal capital flight to perpetuate the ‘economic multiplier factor’. The situation has been geared to the absolute maximum and granting financial concessions to developers ie take on the role of banks and money lenders can only compound matters further with unimaginable dire consequences as expounded in the table above.

Strategies outside the box that can be toyed with during this challenging corrective market cycle amongst others is to institute the following measures:

  • strict approval of new projects and their viability from adding to the glut and strictly refusing to accord any new approvals for projects of a nature where gluts already exist.
  • a comprehensive study of the ‘over hang’ stock and the viability of developers offering a rent than buy proposal as from the developers perspective the properties have already been built and pointless holding onto stock that has difficulties in getting a loan anyway
  • build than sell instead of the other way around as developers would have to take cognisance of the challenging quadrant of the market cycle and initiate discounts albeit sharing their handsome profits over the years.
  • mortgage loans offered to them should be in tandem with normal market rates and features of MRP {mortgage reduction programmes} with interest only loans customised into the equation albeit amnesty periods during the appropriate market cycle as exemplified in the next illustration.

On a parting note, it would be a bad move for borrowers to pay anything above the cost of funds from banks and empowering developers to charge anything from 8% to 12% over a period of thirty years {on the back of an envelope calculation} would see a normal loan at blr to balloon to unimaginable proportions…..a big no as a strict national housing policy is a better long term  strategy which takes into consideration the housing needs of the populace, rather than pandering to the whims and fancies of the developers who appear driven to maximise profits.

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