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City & Country: Mortgage price war abates

The local property mortgage market broke into a fierce price war last year as banks tried to outdo each other, wooing customers with innovative, flexible and competitively priced loan packages. This seemingly came to a halt late last year on bank concerns that the heated competition was preventing industry growth — reducing the overall profitability of home loans.

“They [the banks] did not want competition because it reduced margins,” an industry source tells City & Country. Some banks apparently came to a consensus to rein in their loan packages to check the situation.

The rates war among the banks started when the recession hit last year, reducing overall property sales, transactions and launches.

Before November 2009, banks were offering zero entry costs (or free moving costs) for home loans, which upped the competition in the industry because banks would have to pay for those costs — property transaction fees like legal fees, stamp duty and the valuation report.

These attractive conditions enticed customers to refinance their loans with another bank. A buyer looking for a financing deal had the upper hand as there were so many competitive offers.

“Zero entry cost was the industry killer. Now, when you have no zero entry cost, nobody will move [refinance loans] and the bank’s margins will move higher,” said an industry source. “That was the mutual understanding — no zero entry cost. It was not a written agreement.”

But information on home loan packages compiled by City & Country seems to indicate that the mortgage price war has not stopped completely — it has only abated. Interest rates have generally increased but some banks are still offering the zero entry cost option for their home loan packages.

A survey by City & Country (correct at press time) shows that most banks have dropped the zero entry cost offering except for Citibank, HSBC and Hong Leong Bank. “Any agreement [between the banks] is only temporary,” says a source at a foreign bank who is familiar with the matter.

Mortgage rates have gone up slightly from last November, unlike the days of base lending rate (BLR) minus 2% or 2.4% (refer to table). It must be pointed out that banks usually do not have a fixed across-the-board interest rate. Rates vary according to an applicant’s relationship with the bank and his credit rating. One could also secure a better rate for a property located in a prime location because such properties are more saleable.

An industry analyst says the actual rate that loan applicants get in the end also depends on the project and the partnership between the developer and the bank.

“You may find some people still getting BLR minus 2.4%, but it’s really rare now, and it depends on the type of partnership between the banks and certain developers. Some bank partnerships with reputable developers can provide lower rates for buyers,” the analyst says.

Depending on a property buyer’s objective for buying a property (whether for own use or investment), mortgage rates may not be the most important factor when choosing a home loan, but rather the exit penalty levy of the loan agreement. Some buyers may want to sell the property as soon as the property price appreciates or when it is profitable enough to sell.

However, if the property is sold before the minimum loan lock-in period, an early exit penalty will be imposed (refer to table).

From information gathered by City & Country, the penalty ranges from 2% or up to 5% on usually the original or outstanding loan amount.

On Jan 29, Bank Negara Malaysia’s governor Tan Sri Zeti Akhtar Aziz said Malaysia would need to normalise interest rates from their current “unprecedented levels” as the country recovers from the recession.

Bank Negara kept the interest rate unchanged at 2% but said that it recognised the need to ensure the stance of monetary policy is appropriate to prevent the build-up of financial imbalances that could arise from interest rates being too low for a prolonged period.

According to news reports, some economists are predicting that Bank Negara may begin raising interest rates as early as March.

Lee Heng Guie, an economist at CIMB Investment Bank Bhd, stated in a report on Jan 29 that he sees Bank Negara raising interest rates at a measured pace and possibly sooner than expected — in the first half of 2010 — because of the anticipated stronger economic recovery. Lee estimates the central bank will raise the overnight policy rate (OPR) to 2.5% this year.

“As the economy grows, and looking at historical trends, there is a tendency for interest rates to also rise,” Lim Hong Tat, senior executive vice-president and head of consumer banking at Maybank, told City & Country in an email reply to a question on the possible direction of mortgage rates in the near future.

Public Bank expects mortgage rates to likely remain stable in the near term and expects the OPR to remain unchanged, at least in the first half of this year, supported by the strong liquidity position in the banking system and low inflation environment in the country.

Despite the economic recovery, any interest rate rise may dampen demand for properties, say analysts. They also do not expect property prices to rise too much.

“Prices are going up slow and steady but we will not see a shooting up or sudden jump like in Singapore and Hong Kong. Prices will be trending up but not as much,” a property analyst with RHB Research Institute says.

According to figures from the Urban Redevelopment Authority of Singapore, the island state saw its property prices surge 15.8% in 3Q2009. Home sales in Singapore soared to 10,120 units in 2Q, and 11,518 units in 3Q2009.

Colliers International, a global real estate services company, says demand for property in Hong Kong is expected to rise further and prices are expected to rise by about 10% to 15% in the months ahead. The company anticipates residential prices in the luxury and mass market to grow by 10% to 15% and 15% to 20% respectively in the next six months.

“Malaysian foreign investments aren’t really increasing and the local property scene is limited to local buyers,” the analyst adds.

Government liberalisation measures to abolish most restrictions on the purchase of properties by foreign investors announced last year were good to invite foreigners into the property market again, says the analyst. But the reimposition of a 5% real property gains tax (RPGT) from Jan 1, after it had been waived in April 2007, has thrown a spanner in the works. The government reintroduced RPGT for properties sold before five years of purchase but exempted the tax for properties sold after that period.

“Foreigners don’t want to hold for the long term. And this flip-flop policy gives a negative perception about the industry. Moves like these will not be a good catalyst for property prices to move up much,” the analyst explains.




This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 792, Feb 8-14, 2010.

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