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How will the interest rate cut effect the property market ?

Bank Negara’s recent decision to cut the Overnight Policy Rate (OPR) by 25bps to 2.75% was unexpected, but the general impact would be minimal to most industries.

Banks will be the biggest losers.  That is the general consensus  analysts agree on, although,  impact is likely to only be short-term.

 Impact of the cut on the automotive and property sectors will be slightly positive.

 

Here is a snapshot of the views from analysts of some of the winners and losers :

⬇The Losers: Banks

Analysts believe that it could result in weaker loan growth for banks even though the rate cut is generally expected to result in better affordability,

UOB Kay Hian Research commented that the lukewarm growth in business loans faced by the industry is partly due to policy ambiguity, as shown by slow domestic private investment trends last year.

Alliance DBS Research is of the opinion that while the cut implies good affordability and reduction of asset-quality worries, it is still uncertain if the reduction would grow loan demand.

It pointed out that the rate cut in 2019 did little to change loan growth.

With regards to banks’ net interest margins (NIM), it sees compression in the short term, although the impact would be mitigated by a shift in fixed deposit profiles towards shorter tenures (of up to six months) for major banks.

TA Research mentioned that there is space for another rate reduction in the second half, and noted that the banking sector’s profits would be impacted by this possibility – resulting in about 4% to 6% reduction in earnings.

“A reduction in rates is typically not positive for banks as loan yields would immediately be adjusted accordingly.

“That said, banks with high variable rate loan mix such as Alliance, RHB Bank and CIMB should be affected most, in our view, ” it said.

On the contrary, MIDF Research predicts the impact of the rate cut on banks’ profits and full-year net income to be quiet – based on past trends.

“While we do not discount a short term compression to NIM but it will likely be only for a quarter and will recover rather quickly, ” it said.

 

 

⬆The Winners: Property & REITs, Automotive players

The reduction in OPR rate will lower borrowing costs for home buyers as well as as for property developers, and could be the catalyst to home building and buying activities, said TA Research.

According to its sensitivity analysis, a 25bps cut in lending rate could reduce monthly repayment of a 30-year loan by 2.9%, if the banks updated their base rates (BRs) accordingly.

“Although we note a 2.9% decrease in monthly repayment alone is insufficient to convince consumers to commit to big ticket purchase, we expect consumer sentiment to improve, as lower instalment on loans will free up some cash flows for future spending and improve repayment capabilities, ” said the research house.

A lowering of interest rate, it said, would also result in lower lending costs for REITs to purchase future assets.

Stressing its “overweight” outlook on the property sector, the research house thinks the property industry is exhibiting signs of bottoming out and property developers should try to progress in terms of share price movement.

“With various efforts to spur housing market activities, we believe there are trading opportunities to buy undervalued developers, ” it said.

CGS-CIMB, however, believes the impact on the property industry will be negligible.

It estimated that every 25bp reduction in borrowing rate would lower the monthly instalment for home loans by 1%-3%, depending on the loan tenure.

“Homebuyers’ purchasing power will likely increase in tandem but we expect the upside to be limited, especially for properties in the affordable range of RM300,000-RM500,000, ” it said.

According on its sensitivity analysis, every 25bp cut in borrowing rate would lower the monthly housing mortgage repayments by only about RM32-RM68 or increase a buyer’s eligible loan amount by RM3,000 to RM15,000.

“While the sentiment to purchase properties will likely improve due to lower loan instalments, this could be offset by Malaysia’s muted GDP growth and slowing household income trend, ” it said.

With regards to the automotive sector, it also sees negligible direct impact to the sector, based on historical data.

However, it anticipates the latest 25bp rate cut could help its estimate of a 1.8% year-on-year TIV growth for the auto sector in 2020, seeing the more positive environment for Malaysian customers.

MIDF Research mentioned the rate cut should be good for auto demand, but anticipates sector profits to be offset by a lower ringgit.

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