Second Half Of 2016 -property Status Update

Experts weigh in on the state of homebuyers and developers for the rest of the year.

The Malaysian property market boom between 2009 and 2013 saw the prices of residential units ballooning – with some even doubling in value. Not surprisingly, efforts were taken by the government to mitigate the rising housing prices. This included placing cooling measures such as adjustments to the Real Property Gain Tax (RPGT) and the removal of the Developer Interest Bearing Scheme (DIBS).

At the beginning of the year, Bank Negara Malaysia (BNM) issued stricter guidelines in issuing housing loans. Despite the cooling measures, prices remain considerably high. In many cases, properties have become unaffordable to everyday Malaysians.

The position of the residential sector remains precarious. That situation, however, is largely due to the mismatch of supply and demand by developers, as the average Malaysian has to factor in the rising cost of living and the implementation of the Goods and Services Tax (GST) to make it through the month.

So what does the second half of the year have installed for us? Would the sluggish economy have any further implications? Two experts Sr. Chee Kok Thim, a Chartered Valuation Surveyor from Rahim & Co International Sdn Bhd, and James Wong, a Chartered Surveyor and Director of VPC Alliance weigh in on the matter.

What is causing the slowdown of the residential property market?

Stringent lending rules by the bank

Slow recovery of global economies

Too many launches at inflated prices in 2014 and the years prior to this

Removal of the developers’ interest bearing scheme (DIBS)

The ongoing political uncertainty

Loss of jobs

Political uncertainty

Slow property market

The unstable position of the Ringgit has played a major role in the low number of property transactions and it has caused a reduction in the number of activities for residential construction.

Chee says the slowdown affects the high-rise strata development more than the landed segment of the property market. As a result, developers are experiencing slow sales in their launches.

“There is however still a demand for affordable housing. As such, to make home-buying possible for people on low and medium incomes as well as young people, the Malaysia People’s Housing (PRIMA) Bill 2011 was launched back in July 2011,” he says.

This has prompted numerous developers to incorporate more affordable housing projects into their development plans. He adds that some developers are offering direct discounts, rebates and renovation packages.

These discounts and rebates, however, are not reflected in the Sale and Price Agreement. As a result, buyers are at times getting a 100% loan from the banks. These financing packages include deferred payments, rent-and-purchase schemes, Sunway’s 12:88 payment structure and the 10:90 scheme by SP Setia Bhd.”

The repercussions of the DIBS scheme is now taking effect, as many buyers had to abandon their purchases, as they are unable to service their loans. As a result, developers face with the dilemma of property overhang, which are being directed to this scheme.

“It will be a buyer’s market and home buyers will have multiple choices when they go home hunting. We foresee homebuyers becoming more selective and cautious due to the increased difficulty in obtaining mortgage financing.” He however believes the slower transaction activity within the short term of one to two years will lead to a more stable market and price correction.

The opportunity has presented itself for genuine and first-time homebuyers, as they will have the chance to buy houses with a price correction from the sellers of DIBS schemes – from developers who wants to clear their stocks to buyers who are unable to service their loans.

Dealing with overhang

Based on findings by NAPIC, Wong explains that the overhang units are normally bumi quota units, which makes up between 30% and 50% (depending on guidelines by the individual state) of the whole development. The difficulty in meeting the bumi quota is especially pronounced in areas that are not popular with the Malay community.

“The developer can only release the unsold Bumiputera units to the open market or non-Bumiputera buyers after they have obtained consent from the State Government and pay levy or other payments to the relevant authorities,” he adds.

“When the developer releases these units to non-Bumiputeras, the prices will be higher compared to the initial launch price, which translates to extra profits for them. Hence, it is not a really big issue for the big developers to deal with their existing ‘overhang’, as they normally have ample cash reserves and unbilled sales,” explains Wong. On the other hand, small and medium sized developers usually need to lower prices to sell their housing stocks or look for bulk purchasers.

According to Chee, developers are delaying their launches and slowing down construction activities to lower the supply of residential properties. “When the economy improves and demand exceeds supply, house prices will start to move up again,” he says.

Bank Negara guidelines

The cooling measures implemented by Bank Negara come in the wake of the depreciating value of the Ringgit. To ensure that the already high number of household debts do not escalate further, strict guidelines on loans were issued to banks. For Wong, the stricter lending rules will continue to negatively affect homebuyers and property transaction activities.

The revised budget saw no changes to stimulate the market by changing its rules or easing the restriction. Besides the current schemes that are available for first time home buyers, they would have to wait for a better proposition in obtaining loans. The current buyers market allows buyers to negotiate deals in their favour, however obtaining the necessary loan remains a big obstacle. As such, property transaction will remain low.

Buying a house is a big-ticket item and involves obtaining loans from banks. As Chee points out, the current household debt is at 89.1% to the gross domestic products. This figure is rising and is one of the highest in Southeast Asia. According to him, rejection rates for loans is as high as 70%. The high rejection rates indicate that there is still a demand for properties, but that demand is not being translated into transactions due to loan rejections.

Buyers however should not be alarmed at the high rejection rate. “As the current rejection rate is high, it is now common to include a new clause in the Sale and Purchase Agreement whereby if the vendor fails to obtain a loan from two or three banks and could not proceed with the purchase, the purchaser’s initial deposit will be refunded in full,” says Chee.

What to expect

According to Wong, the current economic conditions, weak property market sentiment and oversupply do not seem to indicate any potential for recovery in the second half of 2016. “We are expecting the property market to be stable and flat in 2017 and market recovery is only expected to be in 2018. This will probably coincide with the General Elections,” he says.

Chee concurs, adding that the sentiments and fundamentals for the second half of this year would remain weak. The large incoming supply over the next one or two years could further dampen the weak sentiment as buyers may continue to adopt a wait-and-see attitude in anticipation of lower selling prices.