Further tightening LTV ratio for property purchases

Bank Negara measures seen slowing down loans growth next year; interest rates might increase 0.25% or even 0.5% next year.

More macro prudential measures, especially those aimed at “cooling” the property market, are expected to be introduced in the fourth quarter or next year amid escalating household debt.

These measures include further tightening the loan-to-value (LTV) ratio for property purchases and the removal of the developer interest-bearing scheme (DIBS) by Bank Negara.

Such measures, according to some analysts and industry observers, could potentially slow down the banking system loan growth next year. However, this would depend on how fast the Economic Transformation Programme (ETP)-related loans are disbursed.

On July 5, the central bank announced a slew of measures aimed at reinforcing responsible lending practices and combating surging household debt. These include shortening the personal financing tenure to a maximum period of 10 years and capping the maximum tenure for residential and non-residential property financing at 35 years.

Malaysia’s household debt to gross domestic product (GDP), which as at March this year stood close to 83%, is among the highest in the region. The country’s household debt has expanded at a rate of 11.5% per annum over the past five years, outpacing the nominal GDP growth of 7.5% per annum.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said that based on the growing concern of the issue of household debt, which remains stubbornly elevated, there could be additional measures to prevent it from rising further. “Measures like LTV ratios could be further reviewed – either by lowering it for third property purchases or even introducing it for second property purchases if necessary,” he told StarBiz.

In 2010, Bank Negara announced a 70% LTV cap on a borrower’s third and subsequent property-financing facility.

Alliance Research banking analyst Cheah King Yoong said he did not discount the possibility of the central bank introducing another round of macro-prudential measures by the fourth quarter or 2014 to ensure a more sustainable loan growth due to high household debt.

He said there could be a possibility that Bank Negara might remove the DIBS. Such a move, according to analysts, was to curb speculative buying of properties. Industry observers said Bank Negara was closely studying the scheme to see whether it was practical to curb it in light of the current economic situation.

StarBiz had, in June, reported that Bank Negara was studying the risks arising from the DIBS, with a view to potentially impose curbs on it.

Under the scheme, buyers need not fork out much initial payment to purchase properties, as the developer supposedly absorbed the initial interest. The buyer only starts paying the instalments after the property is ready.

Cheah said the overnight policy rate might potentially be raised by 25 basis points (bps) or even 50bps in 2014, possibly slowing down the loan growth momentum.

Meanwhile, Maybank Investment Bank Research analyst Desmond Ch’ng said of the various household debt components, risk still lay with mortgages and that further property cooling measures couldn’t be ruled out.

The three main components of household debt are mortgages, which made up some 45% of total household debt as at end-March 2013, transport vehicles (18%) and personal financing (17%). Currently, property loans constitute some 40% of the Malaysian banking system’s lending.

Ch’ng projects a lower banking industry loan growth of 10.2% in 2014 compared with 10.7% this year.

Cheah, on the other hand, is maintaining his industry loan growth forecast for 2013 at 10.5%, although he acknowledges that there is further upside potential should the loan growth momentum pick up in the second half of this year, particularly with the accelerated disbursement of ETP-related loans.

Hwang-DBS Vickers Research banking analyst Lim Su Lin said the new macro prudential measures could affect the growth of mortgages and personal loans.

However, with the ETP projects coming on stream, she does not foresee it impacting the industry’s overall loan growth.

Lim forecasts loan growth this year to be almost similar to next year at 10%. - By By DALJIT DHESI (The Star)

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