The Announcement by our Prime Minister on the measures to increase the My First Home Scheme limit from RM220,000 to RM400,000 and the revised Real Property Gains Tax (RPGT) of 10% if the property is disposed within 2-years of acquisition is best described as being ill advised and is seen as a feeble attempt and will not have any significant impact to minimise the frenzy escalation of property prices.

It is obvious that our PM, in his noble quest to ensure that every Rakyat can afford to have a roof over his/ her head listened to the input of business groups with their own vested interests and agendas.

Revised RPGT

As expected, the Real Estate and Housing Developers’ Association of Malaysia (REHDA) immediately lauded the revised RPGT, saying:

“Increasing the RPGT in the first two years of ownership to 10 per cent will in fact help reduce property speculation and promote a more stable, healthy growth orderly growth housing industry,”.

However, it is unfortunate that our PM has been ill-advised on the true situation. Thus, on the contrary, the Rakyat can expect to see an increase in speculative property investments which will in turn further drive up the prices.

Typically if the property is purchased directly from the Developer, it takes 2-years (for Landed Properties) and 3-years (for Sub-Divided Properties) to be completed. During these construction stages, house buyers are not allowed to sell their properties without the consent of the Developer and can only sell the properties after they have been completed.

What the revised RPGT means in lay-man terms is that speculators can purchase properties from Property Developers upon launch and then flip these properties on completion (after 2 years) and having to pay only the same present 5% (ie within the 3rd and to the 5th year) After the 5th year, all profits are not taxable. With additional attractive financing packages, very often these speculators just need to pay the 10% down payment and walk away with a lucrative gain at the end of the construction period.

Hence, it is understandable why REHDA is very supportive of this revised RPGT as it will only encourage more speculative purchases to the detriment of genuine house buyers. This is also bad for the industry in that a situation of over speculation will set the stage for a meltdown. The high price of houses will entice more and more developers to build more and more houses. In tandem, less and less people can afford to buy houses because their income does not match the cost of houses. Apart from the social crisis created by such a situation, the stage is also set for a meltdown.

If our PM is really serious about curbing speculative prices, HBA had in the past urged the Government to reintroduce the RPGT as follows.

The ‘One-time exemption’ from RPGT should remain as status quo. The majority of house buyers who purchase properties for their own stay or for long term investments will not be affected by the above RPGT Proposal. Even house buyers who invest in properties for long term rental or to cater for their children’s future education will not be adversely affected by the above proposal. However, speculators will not be able to make a quick buck and drive up property prices beyond our reach.

Affordable Housing Scheme

The Government had earlier announced an Affordable Housing Scheme whereby house buyers with an household income of less than RM3,000 a month were exempted from making the 10% down payment on properties costing less than RM220,000. Has budget 2012 raised the threshold to RM6000 for combined income with property prices raised to RM400,000?

Based on Bank Negara Malaysia (BNM) guidelines and the rule of thumb, a single loan repayment cannot exceed 1/3 of the applicant (or joint applicant) Gross Income. There were reports that BNM intends to use Net Income as the basis but pending confirmation/verification, we will just use Gross Income.

Based on a Housing Loan of RM400,000 and based on the Current Base Lending Rate of 6.75% less 2%, the effective rate charged to the customer is 4.75%.

From the above illustration, even applicants with household income of RM6,000 a month will not be able to afford the monthly repayments of a RM400,000 housing loan based on a 30-year repayment period. The figures do not include the other hidden costs such as stamp duties, insurance, legal fees and other outgoings.

Further, a household who can’t afford to fork out the 10% down payment/ deposit from their savings, it is a potential disaster for them to commit to a RM400,000 housing loan. Housebuyers should always match the repayment period with their useful working life and not take a housing loan longer than 30-years, else these applicants will not be able to retire, or they will be encumbering/ committing their children. Of course, Financial Institutions would love to be able to push more Housing Loans and Developers can then push more properties, house buyers must be prudent and spend within their financial means, even if it means buying a cheaper property. The often misunderstood facilities of guarantor provision by CAGAMAS does not protect/ underwrite a buyer from foreclosure in the event of default! All it means is that at the end of the day, after all measures have been taken by the bank to recover the defaulted loans (including the auctioning off of the pledged property), CAGAMAS will only indemnify up to maximum of 10% of the loan sum.

Another flip side of this programme is that developers, realising that there is a big market for such category of houses will then:
• Push the prices of their (say) RM220,000 houses to somewhere near RM400,000
• Build more RM400,000 houses whilst avoiding houses costing less.

One very pertinent factor completely ignored is the effects of an increased household debt-to-income ratio. The increase in borrowing just to buy a house translates directly into higher debt-to-income ratio. This will put a lot of families into precarious financial situations. Contingencies may not be catered for and when such an event arises, a crisis is created.

Increases in the monthly payments of housing loans will directly decrease the amount of money remaining for the other social requirements such as clothings, entertainments, travelling, holidays, eating outs, schooling, healthcare, child-care etc. Hence the other sectors of the economy will be adversely affected somehow or another.

For the Affordable Housing Scheme to be meaningful and to bring about the desired results, the authorities must push for the building of more affordable properties, ie those within the RM220,000 to RM300,000 price range. This lies within the affordability of the middle income group. Further, the Government must make it compulsory for Developers to use the Build-Then-Sell (BTS 10:90) concept, where the buyers only pay 10% down payment and the balance 90% upon completion to safeguard buyers from the risks of project abandonment.

Our PM must cater for inputs from the parties most involved (ie, the housebuyers) and not just listen to vested interest groups which lobby for their self-interest. We urge the PM to seriously consider further and more effective measures to stem the drastic effects of excessive property speculations. Short term GPD growth should not be the sole criteria. We need to create a sustainable housing industry and excessive speculation is certainly one sure way to see the bubble bursting. More importantly, the social aspects on house ownership should take prime consideration.

Islamic Banks to carry the construction risks

It was also reported that basing on the Islamic Loan principle, the risk of abandonment will be carried by the banks. We would like to seek clarification as to whether the system is similar to the BTS 10:90 that is to come on line and made mandatory in year 2015. In the system, house buyers pay 10% upon the signing of the S & P Agreement. No further payment (ie no progressive payments from the buyers’ housing loans) is made until the houses are completed. Or is it a case whereby progressive payments are still made from the housing loan, and the interests are rolled over/compounded and add on to the loan amount. Or are the interests shouldered by the developers (ie factored into the costs of the houses?)

The PR1MA Programme

The PR1MA Programme whereby good location Government lands, such as Sungei Besi, Sg Buluh, Putrajaya, etc will be developed into housing to be sold at concession prices for those deserving buyers. We believe that this is a good programme but our reservation is on the administration and enforcement of this programme. It should not be subject to abuse and misuse. It should be totally transparent in its vetting and allocation process.

On The Revival of Abandoned Housing Projects

We laud the govt’s effort to ease the suffering of house buyers who are facing abandoned projects. Why should tax payers’ money be used to bail out business failures? It is a case of, “Profits Privatised whilst Losses Nationalised.”

This situation is brought about by the Sell Then Build (STB) concept whereby house buyers have no choice but to make progressive payments (disbursed through their housing loans) during the construction phase. When the project is abandoned they do not get a house and they are still made responsible for the loan. The BTS 10:90 concept is the most logical way to insulate the buyers from such hazards. The mechanics are already in place and there is no objection from all parties (Bank Negara Malaysia, Association of Banks, Malaysia, Master Builders Association and all related Professional Bodies) in the industry except from REHDA. The reason is obvious; developers want to continue to do business within the present system that grossly favours them to the serious disadvantage of house buyers. The Government had announced that the BTS 10-90 will be implemented in 2015. We urge the govt to have a ‘time-line’ so that the effect is progressively ‘phased in’ rather that a sudden paradigm shifts in 2015. The Government has to work out a road- map towards making BTS 10:90 a reality.