It has been an “open secret” that housing developers “artificially” inflate property prices and then offer rebates to buyers to help offset the 10% down payment.

This could purportedly help buyers secure 100% end-financing as Bank Negara Malaysia (BNM) has, in 2013, instructed all banks in Malaysia to offer a maximum 90% end-financing based on the net selling prices of properties (after deducting all discounts and rebates offered by housing developers).

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In addition, developers are known to give further discounts on the “10% down payment”, but obviously, these rebates are not subjected to the deductions to reflect the net selling prices.

The recent news reports on inflating housing prices caused by discounts and rebates have made many sit up and take notice and the National House Buyers Association (HBA) is glad that commercial banks are aware of such discounting practices by developers and its impact to the property market. (Read “Are some homebuyers in Malaysia paid to borrow and buy?”)

Buyers bear the consequences of “marked-up” prices

Using an example of a property that is only valued at RM450,000 – to offer a 10% rebate of RM50,000, the developer will inflate the selling price to RM500,000 so the house buyer would get a full loan of RM450,000.

Although such acts appear to help the rakyat buy their dream homes, they do more harm than good in the long run. Some of the negative consequences are:

a) Higher costs to house buyers because costs such as stamp duties for the transfer of properties and loan agreements are based on a regulated percentage of the value of the property or loan. The higher the property price or loan, the higher the stamp duty is. The artificial increase of RM50,000 means the buyer will pay RM1,000 and RM250 more for stamp duties on the transfer of property and loan agreement respectively.

b) Higher interest amount as the house buyer is taking a higher loan. Based on the given example, the total repayment for a loan of RM450,000 (if the property price is RM500,000) versus a loan of RM405,000 (if the property price is RM450,000) for a typical 30-year loan is higher by RM83,000.

c) Pushing up the prices of existing completed properties and future launches. Prices of completed properties, also known as secondary properties, are inter-linked with prices of new launches, also known as primary properties. When the prices of primary properties increase, the owners of secondary properties will also increase their selling prices. This in turn will increase the prices of future launches and the vicious cycle continues, ultimately resulting in prices spinning beyond the reach of the average rakyat.

d) Encourages speculation as house buyers only need to pay the ancillary costs to purchase the properties and service some interests during construction.  Upon completion, the house buyer will then try to flip the property for a quick gain. This method has encouraged a lot of “flippers” in the market i.e. investor clubs and those in for a quick profit.

Transacted price not the true price

The “prices” declared to the government, especially the Valuation and Property Services Department (JPPH), are the “transacted prices” stated in the sale and purchase agreements (SPA) and not their true prices. Hence, when valuations are made, the false information exacerbates price discovery and can lead to valuations that are ever spiralling upwards.

These actions make true price discovery difficult. Sometimes, we wonder how those developers reconcile values in their books – the sale and purchase price versus the “true price” – since they have declared to the banks the SPA prices are the true prices. Similarly, we wonder – how will the auditors and Inland Revenue Board look at them?

HBA acknowledges that one of the most challenging issues in buying a property is to come up with the 10% down payment. To this, HBA has called for first-time house buyers to be allowed to be given 100% end-financing to buy affordable properties costing RM300,000 and below.

In fact, there are various schemes by the government to assist first-time house buyers especially in the B40 and M40 groups to get 100% end-financing, subject to certain terms and conditions.

Buying a property is the biggest purchase that the average rakyat will make in their lifetimes and hence, it is important that aspiring house buyers must save enough money to pay the 10% down payments and be able to afford the monthly instalments while maintaining acceptable standards of living.

Aspiring house buyers must also factor in potential changes in lifestyle, such as having additional children or ageing parents, before committing to the house purchases.

HBA sincerely hopes that commercial banks will really take the necessary measures to ensure that the end-financing amount is reflective of the true value of the property and adopt a responsible lending process.

HBA also calls for BNM to ensure that all banks in Malaysia adhere to the BNM guidelines that end-financing is based on net of discounts and rebates as some banks continue to close their eyes when it comes to this rebate issue.

MCO sale bargains?

The Covid-19 pandemic is expected to take a heavy toll on the property sector, and property developers are expected to give massive rebates to entice house buyers. In fact, a certain developer was reported to have guaranteed “one Proton [car] for every property unit bought”. Hence, more stringent action is required during this critical stage of economic turbulence, else the banking industry will be saddled with property loans that are not reflective of their true values.

Bank files suit on purported inflated mortgages

Down south in Singapore, there is an ongoing case where the Singapore’s High Court is expected to deliver its verdict on this long running legal tussle between United Overseas Bank (UOB) and the developer, Lippo Marina Collection (LMC) this month.

The lawsuit was first filed in Nov 2014 where UOB alleged that LMC had conspired with two property agents to offer “excessive” furniture rebates to the buyers and hence inflated the stated sale prices of units at Marina Collection, a luxury condo at the wealthy enclave of Sentosa Cove. The Bank alleged it was thus misled into granting housing loans based on the inflated prices, instead of the actual purchase prices of the units.

Questions have arisen on whether the purchase prices were misrepresented. Was there fraud? Were payments misrepresented? Was there a case of poor internal controls? Was it a conspiracy to secure an inflated housing loan? Or was it just a case of a property developer handing out generous perks?

The lawsuit was first reported by The Straits Times and now circulated within the banking and finance circle. I would like to update the readers after the High Court pronounces its decision.

Conclusion

For the average person, buying a property is the single biggest financial commitment in his or her lifetime, hence careful thought and planning is a must.

When homebuyers take on a loan that they cannot afford, they will have to cut back on other areas and have very little or no savings for any emergencies such as illness or accidents. It would not be sustainable if you have to skip meals to maintain the loan instalments.

In the event of default in the monthly housing loan instalments, you will face the nightmare of foreclosure proceedings, eviction and ultimately suffering the fate of being house poorer. (Read “So, you want to buy a house?”)

There is no shame in renting until you are financially ready to buy a home. Amidst the slow economy in this current Covid-19 pandemic, you can scout for a low-enough rental that allows you to save for a future house.   

Datuk Chang Kim Loong is the Hon. Secretary-General of the National House Buyers Association (HBA). 
HBA can be contacted at: 
Email: [email protected]
Website: www.hba.org.my 
Tel: +6012 334 5676

This story first appeared in the EdgeProp.my E-weekly on June 18, 2021. You can access back issues here.

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