Current external and internal factors can dampen the Malaysian property market and affect its economy in the long term.
With looming uncertainties, such as the persistent euro crisis and unpredictable global economy, Malaysia would not be spared, said Datuk Ahmad Zaini Othman, president and CEO of Malaysia Building Society Bhd (MBSB).
He was speaking at a panel discussion entitled, “Buy now or wait?” at The Edge Investment Forum on Real Estate 2012.
The situation is further exacerbated by Bank Negara Malaysia’s stricter guidelines on responsible financing, which dictates that banks have to assess loan applications based on net disposable income.
“In the past when loan application approvals were based on gross disposal income, nine out of 10 applications were approved. Now, the approval rate is estimated at around 40%. There is a situation where one is unable to secure financing,” said Ahmad Zaini.
The stricter financing guidelines requires banks to scrutinise parameters such as affordability assessments, net disposable income and debt service ratio.
He added that although the guidelines are perceived to be something new, some financial institutions began looking at these parameters before Bank Negara’s announcement last year.
The guidelines are aimed at reducing speculation, normalising housing prices and controlling household debt. An immediate impact of such circumstances would be a cautious investor market.
“Buyers will adopt a wait-and-see approach, and developers will be watching and analysing and being very selective with their launches. Buyers and developers may defer investments because why would they invest when they know the economy is not going to pick up and banks are not going to lend? This will put a damper on sales,” said Ahmad Zaini.
He believed this would impact the economy negatively in the long run, especially if interest rates rise further. “The more serious issue is the possible ripple effect. In the long term, it can affect supporting industries in the property sector and eventually the economy. The property sector is an important sector in the growth of the country’s economy. We have to monitor the ripple effect very closely,” he said.
In explaining the ripple effect, he said, for instance, that financial institutions may prefer to finance developers only after construction starts, and not before, to reduce risks. When that happens, small developers may be affected by the limited funding, causing them to scale down or even abandon their projects. Major developers that are financially stronger may not be impacted as much and will be able to go on developing. This also means that supply will be affected and there may even be a shortfall, thus driving prices up due to strong demand.
On whether to buy now or wait, Ahmad Zaini said in the current environment, one can no longer buy or sell based on perception alone. “Investors and buyers must buy and sell based on fundamentals. You must observe not only our economy but also those in keys parts of the world like Europe, the US and China, and study the trends such as unemployment and production. We are no longer living in a fishbowl economy,” he said.
From a financing perspective, he adds, gone are the days when banks would finance nearly every project for developers. In such an environment, he felt that only developers with the financial strength would survive.
Hence, it is best to, “buy from established and financially sound developers. You have to be careful as project failure can happen,” said Ahmad Zaini, noting that the best time to buy is when the market stabilises after the initial market reaction.
On ways to address the issue of project failure, Ahmad Zaini suggests that banks set up monitoring units to check on the progress of projects. “In the past, banks monitored projects mostly through documentation, and not through a hands-on approach. Banks should set up units that comprise technical personnel, such as engineers and contractors, to monitor the progress as they are the ones who can really assess the progress of a project,” said Ahmad Zaini, adding that MBSB has already set up such a unit.
In conclusion, he said, “If you are buying to invest, you really need to study and know the market. If you’re buying for own use, anytime is a good time.”
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 909, May 7-13, 2012
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