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Mortgage tightening to hit high-end properties

KUALA LUMPUR: The higher end of the Malaysian property market will likely be hit most severely should Bank Negara Malaysia (BNM) initiate measures for banks to compute household debt based on a borrower’s net income rather than gross income, said RHB Research.

In a note yesterday, RHB Research said its analysis found that the measure would lower the affordability of property by an estimated 14% (for gross monthly salary of RM2,500) to 37% (gross monthly salary of RM120,000).

The most severe impact will likely be on the high-end property segment and the mass or medium-priced market will likely see a smaller impact, particularly if first-time home buyers are excluded.

To illustrate, RHB Research said an individual earning a gross monthly salary of RM5,000 would be able to afford a property valued at RM300,000 if mortgages were to be calculated on a gross income basis, using the rule of thumb of five times of gross salary per annum.

However, if mortgages were calculated on a net income basis, the same individual will only be able to buy a property valued at RM231,000.

The difference is even more stark with higher-income earners.

Based on RHB Research’s analysis, an individual earning a gross salary of RM50,000 would be able to afford a property valued at RM3 million if mortgages were to be calculated on a gross income basis.

Assuming the mortgage tightening measures are in place, a person earning a gross monthly wage of RM50,000 can only afford a property valued at RM1.89 million.

“If supply is to match demand, it implies that prices will have to correct by a similar or smaller percentage for the supply to be absorbed or developers will start to slow down their launches to limit the supply in the market,” it said.  

RHB Research said it is understandable for BNM to take action as household debts surged to record highs in 2009 and 2010 largely owing to low interest rates and easy financing schemes for property purchases.

According to government data, Malaysia’s debt-to-GDP ratio is on the rise, surpassing the 70% mark in 2009 when it touched 76% before inching down marginally to 75.9% in 2010.  

The household debt uptrend in recent years has been a matter of concern as the ratio remained at 60% levels from 2002 to 2008.

The Edge had in July reported that BMM was considering the proposal to compute mortgage eligibility based on net income and issued a white paper to obtain feedback from bankers.

RHB Research said it did not rule out the possibility of the proposed regulatory tightening measure being implemented despite the less encouraging economic outlook.

“In our view, administrative measure will be the only tool left to curb excessive growth in mortgage loans when interest rate is not expected to increase as economic growth slows down,” the research house said.

It also said BNM still has room for more stringent measures to cool the property market as earlier steps taken were less severe compared with policies imposed in the region, such as Singapore, Hong Kong and China.

Malaysia’s property market lags its regional peers in terms of price appreciation, transaction volumes and liberalisation, RHB Research noted.

Effective November 2010, BNM implemented a loan-to-value cap of 70% for the third outstanding mortgage loan onwards.

Another possible measure is the real property gains tax (RPGT) which RHB Research said was a more meaningful way to curb speculation in the local property market.

Since January 2010, disposals within the first five years of purchase have attracted a flat rate of 5%.

If the government chooses this avenue to curb property speculation, RHB Research expects the RPGT rate to revert to levels prior to April 1, 2007 or lower.

Before April 1, 2007, capital gains on properties disposed  of within the first two years of purchase were taxed at 30% and a progressively lower rate in subsequent years.

The regulatory measures, if any, are expected to be unveiled when the government tables Budget 2012 in Parliament on Oct 7.

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