HBA says scheme will drag house buyers deeper in debt
THE National House Buyers Association (HBA) views with grave concern on the statement by the Urban Well-being, Housing and Local Government Minister Tan Sri Noh Omar that eligible housing developers can now apply for moneylenders licences to provide loan facilities of up to 100% to property buyers.
Instead of assisting house buyers get a “soft loan”, it seems that house buyers are dragged into deeper debts unwittingly. Such a “scheme” will only bring more harm than good and we will attempt to elaborate why.
The effective interest rate for a conventional housing loan, from banks and financial institution, ranges between 4.6% and 5% depending on various factors such as the amount borrowed, risk profile of the borrower, duration of the housing loan and the type of property. It must be noted that the interest rate for housing loans are based on the “reducing balance” as the interest rate is calculated based on the actual principle amount outstanding.
The minister was quoted to have said that the “interest rate for loan taken under the scheme varies from maximum 12% with collateral and up to 18% without collateral.” This interest is more than double what is typically offered by banks and will greatly burden the borrowers of such a “scheme”.
As it is, many borrowers are already struggling with housing loans of 5%, thus taking a housing loan with interest of 12% is just plainly asking for trouble.
Developers offering such a “scheme” must also clarify whether the interest rate offered is based on a “reducing balance” or is actually a fixed-rate loan which is permitted under the Moneylenders Act, 1951.
This is because for loans given under the Moneylenders Act such as personal loans and hire-purchase, the interest to be repaid is fixed upfront and does not reduce as the principal is being repaid over the tenure of the loan. Hence, such fixed-rate loans quoted at, say 12% for a tenure of 20 years, the effective interest rate is actually much higher at 16.34%. This is more than three times higher compared with a conventional bank at 4.6% to 5%.
Accelerate property bubble
Being a licensed moneylender a.k.a licensed “ah long” is capital intensive and for housing developers to sustain their business, they will continue to price their products at unsustainable prices; this can accelerate a housing bubble like what happened in the United States during the subprime crisis.
Property developers will be driven by greed to approve loans to borrowers who do not meet their minimum lending criteria just to close the sale and there will be a very high chance that these borrowers will default on their loans, especially given the high fixed interest rates of 12% to 18%.
As more and more borrowers default, this will trigger a domino effect that will burst the property bubble and trigger a larger widespread economic recession for the entire country. House buyers who indulge in this scheme will be facing a double jeopardy in having to “service” two loans inevitably – the licensed “ah long” loan and the legitimate bank housing loan. Question: How long can he sustain?
Housing development project account
The Housing Development Project Account requires all transactions to the said account under the law. If the developer gives loans to buy its own houses and if it fails to complete the houses, what will happen?
Will it release the loan amount to itself? Isn’t there a conflict of interest in this scenario? Will it exercise a fiduciary duty of care for its customers-cum-buyers-cum-borrowers?
Profits privatised – losses nationalised
Banks have invested large amount of resources to develop the necessary tools to carry out proper credit assessments, collection monitoring and recovery.
Developers simply lack the resources and without the required economies-of-scale, cannot find the resources to invest in the required hardware, systems or training. This means that the chances of default of such borrowers are very high and developers will not be able to face the financial implications if too many borrowers start to default on their loans.
These developers could go “belly-up” and the property market being the engine of growth will affect our economy. It will be another case of “profits privatised – losses nationalised”.
Was Bank Negara consulted?
Bank Negara has played a central pivotal and important role in ensuring a sustainable financial sector. Banks are strictly regulated and have to comply with various regulations ranging from Financial Services Act and other laws such as Anti Money Laundering Act.
HBA would like to ask if the minister has consulted the central bank prior to announcing this proposal and whether it has given its blessing, as the failure of such a scheme as highlighted above can have wide ramifications for the economy and country at large.
Balancing the risk between buying and renting
Buying and owning a house is a riskier proposition for households compared with renting. Buyers take on enormous debts, sign multi-year loan agreements and become responsible for the cost of their homes while renting is a much easier undertaking. The Government should encourage potential house buyers to rent if they do not even have the “upfront seed money”.
Be mindful that foreclosures can devastate a family’s economic and social standing, leaving them poorer instead. Making sure households have sufficient personal financial management skills is more than a supplementary issue.
Financiers, local authorities and communities benefit from homeowners being better informed of their rights and responsibilities as house buyers and loan borrowers. Support for potential house buyers and owners is crucial, otherwise they will end up “house poorer”.
HBA humbly appeals to our Prime Minister who is also the Finance Minister to intervene in this proposal as it does not address the root cause of high property prices, which is due to excessive speculation, but will encourage developers to price their properties higher and give loans to undeserving borrowers.
This scheme, if implemented, will result in even higher property prices and further exacerbate the housing crisis. The best solution in this current climate is for developers to built and buyers to rent first, with the option for the tenants to buy at a later date.
Chang Kim Loong is the secretary-general of the National House Buyers Association: www.hba.org.my , a non-profit, non-governmental organisation manned by volunteers. He is also the NGO councillor at the Subang Jaya Municipality Council.