A proposal to change the way housing loans are approved has property consultants and analysts worried as they felt loans given based on net income as opposed to gross income would dampen demand for housing.
Some banks, however, don't have an issue with the proposed changes as one banker said changes to the debt serviceability ratio would be good for the housing market. He said the proposed changes were for the benefit of home buyers.
“It's up to the banks to manage it. Banks have their own ways to control and approve loans,” said Zerin Properties CEO Previndran Singhe.
Previndran was critical of the proposed change, saying such a drastic move would be self defeating and would mean more Malaysians could not afford homes.
Henry Butcher Marketing Sdn Bhd chief operating officer Tang Chee Meng said such a move would tantamount to a limit on the amount of money a person could borrow to buy a house.
Although lower demand may push prices down, he does not think developers may be able to reduce prices by much given the increase in building material prices over the years that has pushed the cost of building a home upwards.
“I will support any measure by the Government to cool down the property market so there is no bubble, but they have to be careful when taking measures and need to determine if there is really an asset bubble building up,” Tang said.
One analyst who covers the sector said such a measure, if it was to control speculation in the property sector, was not needed at the moment as house prices would soften in a period of weak demand brought about by an economic slowdown.
“Developers and banks would surely lobby against such a move,” she said, worried about the chain reaction a weaker property market would have on the overall economy.
RHB Research Institute on Monday analysed the proposed changes and concluded that a move to change the assessment of eligibility for housing loans to a net income basis would lower affordability by 14% to 37%.
It said the high-end market would be most affected, and should supply match demand then prices would have to correct by a similar or smaller percentage, or supply will have to be reduced to hold up prices.
“The mass market segment which is largely concentrated in the medium-priced range will see smaller impact, especially if first-time home buyers are excluded from this measure,” it said.
While some might see the measure as a move to bring down the price of homes, others think such a move by Bank Negara would in turn ease the growth in household indebtedness.
Bank Negara, which had been looking to introduce guidelines to stress-test individual borrowers this quarter, has sought the opinion of banks on the proposed move.
One of the factors that precipitated that move is the buildup of debt that has seen household debt to GDP ratio reach nearly 76%, which is on the high side compared with countries in South-East Asia.
“It is understandable for Bank Negara to take action given that the rising household debt, as measured by household debt to GDP ratio, has surged to a record high level in 2009 and 2010, largely stimulated by low interest rate and easy financing scheme for property purchase,” said RHB.
With residential loans rising 14.7% in July, residential loans accounted for 54.3% of total loans in the same month, up from 49.7% a year ago.
Although housing loans had been the biggest contributor to the increase in household debt, the buildup of personal loans had also been rapid and that had caught the attention of the regulator.
CIMB Investment Bank Bhd economic research head Lee Heng Guie concurred that the proposal would affect demand for housing, but said the intention of the proposed change was to get people to buy what they can afford.
Lee said any decision to implement the new computation method had to be weighed against the current sluggish global economic situation.
And while household debt may be an issue, the ability of households to service their loans do not appear to be a problem as yet.
Lee said that in 2010, for every ringgit of income, households paid 47.8 sen to service their debt.
The debt service ratio of household debt was 49 sen in 2009, 39.5 sen in 2008 and 41.1 sen in 2007 and the factors that affect that ratio is household income and the interest rate outlook. - By Jagdev Singh Sidhu (The Star)