The growth of residential properties and housing loans

Properties cannot grow without its twin brother's help - the banks. Over the years, we have witnessed the growth of the residential property sector, both in terms of prices as well as total houses sold. I have not been comfortable with the property sector for quite a while, especially since 2010. There are very little being talked about the danger of the loan exposure to the property sector as well as the financial sector - mainly banks because the lesser we talk about this, it is hoped that nothing will happen.

I could not see or project for sure how the sector will pan out in the near of medium future, but as I said I have not been comfortable. Let me show some numbers as below.

The above chart shows the loans to personal consumption market. I have taken out the commercial sector loan. The total loan is the total for all purposes - inclusive of housing, credit cards, commercial purposed, cars etc. As it is based on above, the Compounded Average Growth Rate (CAGR) of Total Loans between 1997 and 2012, is already very high at 9.03% (above average GDP) but the CAGR for loans to the residential property sector grew even faster - at a whopping 15.34%.

Another clearer table is shown below. The percentage of residential property loan to total loan size grew from 11.07% in 1997 to 27.24% in 2012. (highlighted in yellow)

On the other hand, the loans for purchases of securities to total loans dropped from 11.85% in 1997 to 4.54% in 2012. As at 2012, loans to residential consists of more than a quarter of the total loans. Is it worrying enough?

To soothe the worry, % residential loans to total loans exceeded 20% since 2001. Total loans however has started to register double digit growth since 2004 (except for 2007 and 2009). The question now is whether keeping residential loans to total loans of 25% to 30% is a new normal.

We have heard of the sector being still bullish-ly projected by research houses still in the future. Frankly, I am not too sure but we know the housing sector is much too dependent on financial sector. And I am sure that the loans growth cannot continue to grow more than 10% all the time. Sometime, it has to slow down.

We see what happened to the US housing market and the collapse of it. The aftermath, what happened to the banking sector - i.e. to Bank of America, Citigroup and many others. The Malaysian housing loan profile is a lot different to the US crisis, as the collapse were quickly done by subprime in US while in Malaysia, that part is not a thing to worry about. But still these numbers does not seem good.

Property prices beyond reach? Think again.

During good times, banks can act as the lubricant of the economic growth of a country. If over exposed and uncontrolled, banks can also cause havoc to a country's economic health. We do not have to look too far behind - remember the sub-prime crisis in US in year 2008. Started off before Obama's presidency and now it is towards the end of his first term, until today, the housing crisis is yet unresolved.

I could not help thinking why over the last few years - in fact a year after the sub-prime crisis, why is it that the property prices in Malaysia (similarly in many other cities around Asia) jumped by leaps and bounds over a period of just 3 years. For example, I was looking at a piece of leasehold residential land in Kota Damansara - 3 years ago the price it was fetching - RM60 per sq ft, now RM150 per sq ft or even more. Now that's land, I have even heard of completed properties (especially high end) have gone up even more in terms of percentage.

Who is at fault? If you believe me, banks and developers are the biggest speculators. Are they overplaying their role here?

Let me provide you a scenario.

To get a smallish decent little new apartment of around 1,000 sq ft at the outskirt of the KL or PJ city, it would have costs at least RM350,000. You may think that it is very expensive, but try to do some calculations. For a household / person who earns say RM4,000 (now RM4,000 per household in Klang Valley, Penang of JB for that matter is not high), would the person be able to pay for a RM350,000 apartment? Let's look at the calculator provided by Maybank below.

Based on the above, the affordability level is possibly yes. As an illustration from above, for any household to buy a property worth RM350,000, his / her monthly repayment is RM1,504 assuming the interest rate is being charged at 4%. Mind you the loan is for 30 years which means for a 30 year old, he / she will have to pay until 60 years of age. He / she however will still need to fork out the downpayment of RM35,000 for 10% (as banks will only fund 90%) as well as other related fees which will probably come to another RM20,000. All in all, that is RM55,000 for just the downpayment and fees alone. Will the person be able to save up or come out with that amount? Possible. Assuming that they have saved some RM20,000 to RM30,000 and with the assistance from EPF's withdrawal for housing loan, the person may be able to manage.

(Let's not talk about renovation as some of the times, the property is for speculation.)

With the repayment that he / she has to make to the bank, what about his lifestyle - can he / she makes ends meet? With RM4,000 income, the take home will probably be around RM3,500. Deduct the loan repayment of RM1,504 - around RM2,000 will be available to pay for transport (if car, bank financing again), utilities, travel costs, food, some slight entertainment. That's tight but for anyone which has some flexibilities from credit card, some little additional claims, bonuses here and there etc., it is possible.

Now, let's look at what has made this possible? Wasn't this same thing made available by the banks 5 - 10 years ago?

Because of the Banks - Interest rates at its lowest

If you look at the BLR table below, because of the spillover effect of sub-prime, Bank Negara has caused reduction of BLR to a historical minimum 5.55%. To top off with that, because of costs of funds for banks have gone much lower, property financing rates have gone below BLR rather than above BLR which was the norm prior to this. Hence, at BLR - 2.4% or even more today for example, borrowers are able to get rates as low as 4% - 4.2%.

The lower the rate, the higher the affordability.

What about years of financing? I remember, prior to 1997, it was 20 - 25 years for maximum years of financing. After the Asian crisis, now there are banks (in fact most) which are providing property financing terms of up to 40 years.

What about developers?

Heard of the 5/95 plan? To make properties even more affordable, I have seen this plan initiated since 2008. Basically the 5/95 plan is to allow buyers to just pay for 5% downpayment for their booking and purchase. The remaining 95% will only be paid upon completion of properties. No interest will be paid during the construction.

Of course banks will still have to approve the loan as the risks of payment is still at the purchasers side. Hence, over here again the banks and developers are working together - knowingly or unknowingly in increasing the value of launches.

(This is different from the Build Then Sell concept which is highly recommended)

In essence, this has caused higher affordability level and of course even more speculations. Why? The person only needs to pay 5%, and nothing else until completion. After completion, some would expect to flip the properties hence making a quick profit out of this speculation albeit from a low upfront downpayment.

This scheme while it is helpful to the developers to sell properties, unfortunately may have caused some over excessive speculations.

Do you now believe the excessive pricing are due more to these 2 sectors rather than inflationary pressure - say oil, or material prices? Do you think that because price of property is part of the CPI, it is inflationary as well?

Now you know why in my blog, I have never covered any property companies or banks, especially now. This is because if there are any economic calamities (and I am not saying for sure there are), do run cover from these sectors fast. More often than not, we would not be able to sell fast enough. The risk for me is a little bit too high.

I couldn't help thinking the design of the packages for the last few years was to allow potential buyers within reach based on the income level, but basically the developers could not care less of what happens when the economy face a slight twitch or banks just could not hold on to the largely consumption loan anymore. Even if there are no crashes in the property prices, I still feel that the overpricing of the properties are due to the two parties - banks and property developers. And some parties have just the role to regulate more to help the man on the streets, as we do not want another Greenspan - who overslept and caught it way too late.



Note: If 16 or less banks can illegally coordinate to control the LIBOR rate, I have no doubt that banks and larger property companies can do the same together and it may not even be illegal in this case.

EPF's RM1.5b loan scheme: When the crux of the matter is not addressed

A government has the duty to address matters of public housing to those who cannot afford private properties while doing their best to maintain the prices of properties in check.

What we have seen over the last many years are sheer lack of interests to address matters with regards to housing by the Malaysian government. There are just too many cases of property developers abandoning projects and eloping with the deposits and any other progress payments that cheated buyers have made. After many disappointments and through lack of initiatives to keep prices of properties in check especially in Klang Valley, Penang and Johor, they have come out with this scheme that can be considered to be a joke.

What can EPF (who is supposed to be protecting the savings of the Malaysian employees) do to help public housing? Provide financing at high interest rates to high risk clients? That is not the solution. The poorer group cannot afford to pay high interest rates on top of the principals especially with matters concerning the biggest portion of payment out of their monthly household income. At 6.5% to be charged, it is way higher than the current market rate of 4.0% to 5.0%. Housing firstly should be made affordable to all. Then you will not see situations of a huge "baby boomers" group being left out of doldrums without a roof under their head due to price.

There are 9 local banks in Malaysia (largest 3 out of 4 are owned by government), because of pure greed did not do anything to keep the spiraling property prices in check over the last 5 years. If I may, I would go to the extent to call that it is the financial institutions that have greedily speculated the property market together with the developers at the expense of the consumers. Yes, they are the ones that provide financing for 2nd and 3rd home (etc) with almost zero upfront payment terms and up to 40 years. Beyond 30 years financing, this is basically asking for the children of the borrowers to bear some of the burden as very few can have the liberty to maintain their jobs past 60. If you are encouraging a wealthier group to own more than 1 property with ridiculously low barrier of entry, this is what happens. It becomes a massive speculation.

Then you want to charge the poor (who already cannot afford) a higher interest rate. This is pure capitalism at play! Cheaper or subsidized financing for the ones who deserve it should be from the government's coffers. A government has many sources of income. Chief among them from taxes. And for this government, they should look at education, health, affordable properties and security as their main concern.

EPF's role has for so many years been providing loans to the government by subscribing to the Malaysian Government Bonds. Yes! with the funds continue to grow at a very fast pace, EPF is finding it tougher to allocate funds and provide the returns its depositors are expecting of them. But lets not reinvent the wheel with a creative scheme where EPF will lend the money to a special purpose vehicle, with guarantees from DBKL. In financial terms, this is an "off balance sheet" item for the government which they will bear anyway. Surely one could remember the biggest "off balance sheet" trick which went wayward awry was the House of Cards created in the housing collapse in US.

While the first RM1.5 billion is a small start as opposed to the size of the housing collapse in US, I am sure if not in check the government of the day (knowing them) would create a bigger hole.

Tackle the bulls by the horn. Housing should be the problem (no matter how difficult) for the government to address, not by some creative schemes.