KUALA LUMPUR: Persistent high house prices continue to be an area which requires attention due to its effect on household indebtedness and the exposure of financial institutions to the property market.
Bank Negara Malaysia (BNM), in its 2013 Financial Services and Payment Systems Report (FSPSR), said any substantial correction in property prices can add pressure to the balance sheets of financial institutions.
The central bank said the total exposure of financial institutions to the property sector rose by 14.3% in 2013 to RM553.5 billion. Close to 65% of such exposure was for loans extended for the purchase of residential properties while 29% was for the purchase of non-residential properties.
BNM said house prices rose across the board for all property categories, with stronger growth observed for detached and high-rise properties.
“The concentration in new property launches on high-end properties continued to exert upward pressure on prices of other properties.
“Housing affordability will remain challenging for households in major city centres in the near term as the incoming supply of housing units under initiatives by the government will take time to materialise.”
BNM said house prices continued to be high despite several measures introduced by the government last year to control the spiralling prices.
In July 2013, the central bank reduced the maximum tenure for financing granted for the purchase of properties to 35 years from 45 years to ensure that assessments of households’ debt repayment capacity were not being undermined by extended financing tenures.
Then in November 2013, BNM prohibited financial institutions from financing new development projects and end-purchases of properties with elements of interest capitalisation schemes (ICS), including developer interest bearing schemes (DIBS), which have contributed to property prices exceeding the true valuations and lower entry costs for property speculators.
BNM said the structural mismatch between supply and demand has been partly attributed to rising land prices and construction costs, driving developers to build high-end properties which have higher margins.
It said risks to household finances and banks arising from potential price corrections in the property market are limited as speculative buying is not substantial while banks are committed to responsible lending.
“Based on BNM’s supervisory monitoring, there is also no strong evidence to suggest a widespread trend of home owners increasing their leverage by taking on more borrowing [through refinancing] against the rising value of their properties for consumption purposes.
“This is supported by the sustained growth of 6.7% (2012: +6.5%) in housing loan repayments during the year. Measures taken by BNM to strengthen affordability assessments by banks further ensure that new borrowings are supported by household income rather than rising property valuations.”
The central bank said borrowers with one housing loan account are usually owner-occupants or strategic investors with high propensity to servicing housing loans and are less likely to dispose of their properties when the market is less favourable.
This helps limit defaults and credit losses to banks in the event of a price correction in a property market.
The central bank said financial institutions’ exposure to the non-residential segment of the property market saw a slower growth of 17.7% in 2013, compared with 19.4% in 2012.
Financing for the purchase of shops, land and office space accounted for 5%, 2.7% and 1.9% respectively of total bank loans.
BNM reported that the financing exposure of banks for the purchase of shops and land remained small with a low and stable level of delinquencies.
This article first appeared in The Edge Financial Daily, on March 20, 2014.
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