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KUALA LUMPUR: In mid-May, Bank Negara Malaysia (BNM) revised its key Overnight Policy Rate (OPR) by another 25 basis points, following a rate hike by the same quantum earlier this year.
Shortly after that, most banks revised their Base Lending Rate (BLR) accordingly to 6.05%. After a total interest rate hike of 50 basis points since the start of 2010, has this had any impact on the country’s property market and mortgage lending activities?
Mortgage Broker Sdn Bhd sales director Adrian Un sees no immediate impact on mortgage lending activities. This is because the effective interest rate is still hovering around 4% to 4.2%, making the borrowing cost still relatively cheap, he said. “Purchasers are still flocking to developers’ sales officers, and are dealing with various real estate agents,” he said.
According to Liew Swee Lin, executive vice-president, head of consumer banking of Alliance Bank Bhd, the recent BLR increase of 0.25% is considered marginal. “This translates to a 2% to 3% increase in monthly loan commitments which we deem to be within the tolerance of the homeowner. Consequently, we would neither expect any significant impact on mortgage lending activities nor have we observed any since the revision,” she said.
Property consultant James Tan of Raine & Horne International Zaki + Partners shares a similar view. “The increase in the BLR and OPR has had no effect at all on the property market. In fact, there has been an increase in prices,” he noted. Tan foresees that rising interest rate will only have an impact on property market when banks increase the spread to more than 2% to 3%, or when the BLR hits more than 7% to 8%.
However, are the rapidly rising prices sustaintable?
Group chief economist of RAM Holdings Dr Yeah Kim Leng said the spillover of escalating prices in high-end, niche segments to the broader housing market, especially the terraced and mid-range condominiums in urban areas, is a concern.
“We note that it is hard to agree on what constitutes a bubble, but clearly, double-digit price increases are unsustainable, especially if the price escalation is fuelled by excessive price mark-ups, speculative purchases, over-leveraging and easy credit conditions,” he said.
Meanwhile, Liew said the latest House Price Index (HPI) statistics released by Napic (Department of Valuation & Property Services) indicated an increase of only 1.5% for 2009, and 4.7% in 2008, which suggests that the sector was not heading towards a bubble.
But property consultant Tan said it was essential to get back to the fundamentals. “Incomes have not kept up with property prices at all. Prices have shot up across the board of more than 20% to 30% over the past one year. Yields are dropping drastically. The net return on shophouses tended to fetch around 6% to 7%, but it is less than 5% now,” he noted.
That said, Yeah reckoned that the local housing market has not reached the “bubble-like” state seen in other Asian countries such as China, Singapore and Hong Kong. Yeah predicted the recent acceleration in property prices and mortgage lending to moderate as the effects of higher OPR and BLR kick in.
“Higher lending rates have the effect of dampening speculative buying as well as overall demand as borrowing costs edge up,” he said, while predicting that genuine home buyers will be less pressured to rush their purchase decisions with the gradual dampening of rising house price expectations.
According to him, potential oversupply in a number of property segments, including in hot areas such as Klang Valley, together with the gradual pace of credit tightening and declining affordability, should help to dampen price run-ups.
These should help prevent a full-blown bubble from developing and subsequently collapsing, as experienced recently in the US and European property markets, concluded Yeah.
Nonetheless, Yeah doesn’t expect home sales to fall off sharply as lending rates have not peaked. “There will be buyers, especially owner-occupied ones, who are looking to lock in the low interest rates before they are raised.”
This article appeared in The Edge Financial Daily, June 1, 2010.
