Banks have trained eyes to identify the real thing from those guised pricing and hence, should act as the final checker of property prices.
This article was in response to a report on financing issues entitled: “Banks aware of ‘discounts’ given by developers”. The House Buyers Association of Malaysia (HBA) is glad to hear the report of “two commercial banks stating that they are aware of discounting practices by developers recently and have taken the necessary mitigating measures to ensure that the end-financing is reflective of the “value of the property purchased”.
Debunking The “Open Secret” & Marketing Ploy
For many years, HBA has spoken against the “open secret” of housing developers who artificially inflate property prices and then offer a rebate to offset against the 10% down payment, thus indirectly giving their buyers up to 100% endfinancing. As far back as the year 2013, Bank Negara Malaysia (BNM) had officially instructed all banks in Malaysia to offer a maximum 90% end-financing based on the net selling price of the property after deducting all discounts and rebates offered by housing developers. However, housing developers continued to openly advertise the existence of such rebates. It was only lately that the Real Estate Housing Developers Association of Malaysia (REHDA) highlighted the issue whereby house buyers were not given full financing which means that most banks just closed both eyes when it came to the rebate issue.
Effects of “Marked-Up” Prices
Although the act of increasing the property price and then offering a rebate, say up to 10% appears to help the rakyat to purchase their dream homes, such acts actually do more harm than good in the long run. Using the example of a property that is only valued at RM450,000, should the housing developer want to offer a 10% rebate, the selling price will then be inflated to RM500,000 and the developer would then offer a 10% rebate equal to RM50,000. Hence, the house buyer would get a full loan of RM450,000. Some of the negative consequences of this rebate nonsense would result in: • Higher cost to the house buyer as costs such as Stamp Duty for the transfer of properties and Loan Agreements are based on a regulated percentage of the value of the property or loan. Therefore, the higher the property price or loan, the higher the Stamp Duty. The artificial increase of RM50,000 will hence result in a higher Stamp Duty on the transfer of property of RM1,000 and loan agreement of RM250.
• Higher interest as the house buyer will end up taking a higher loan. In our current example, the total loan repayment for a loan of RM450,000 versus a loan of RM405,000 (RM450,000 at a 90% housing loan) for a typical 30-year loan is higher by RM83,000. • Increase in the prices of existing completed properties and future launches. Prices of completed properties Which are also known as Secondary Properties are inter-linked with prices of new launches, also known as Primary Properties. When even the prices of Primary Properties increase, the owners of Secondary Properties will also increase their selling price. This in turn, will also increase the prices of future launches and the vicious cycle continues. This will ultimately result in property prices increasing out of the reach of the average rakyat • Encourages speculation as the house buyer only needs to pay the ancillary cost to purchase the property and service some interest during construction. Upon completion, the house buyer will then try to flip the property for a quick gain. This method has encouraged a lot of “flippers” in the market for example as seen in the sprouting of investors clubs and those in for a quick profit.
• The “prices” declared to the government especially to Jabatan Pernilaian dan Perkhidmatan Harta, Malaysia (JPPH) are the “transacted prices” stated in the Sale and Purchase Agreement (SPA) and are not reflective of the true price. Hence, when valuations are made, the false information exacerbates price discovery and can lead to valuations that are ever spiraling. These actions make true price discovery difficult. Sometimes, we wonder how those developers reconcile in their books; the SPA price verses the “true price”, since they have declared to the banks that the SPA prices are the true prices. Similarly, we wonder how the auditors and Lembaga Hasil Dalam Negeri (LHDN) will access their accounts. HBA acknowledges that one of the most challenging issues in buying a property is to come up with the 10% down payment. In response to this issue, HBA has called for first time house buyers to be allowed to be given 100% end- financing to buy affordable properties priced at RM300,000 and below. In fact, there are various schemes by the government to assist first time house buyers – especially those who fall in the B40 and M40 segments to get 100% end-financing subject to the fulfillment of certain terms and conditions. Buying property is the biggest purchase that the average rakyat will make in their lifetime. Hence, it is important that aspiring house buyersmust save enough money to pay the
10% down payment and be able to afford the monthly installments whilst maintaining an acceptable standard of living. Aspiring house buyers must also factor in potential changes in lifestyle such as having additional children or aging parents before committing to the house purchase. HBA sincerely hopes that commercial banks will really take the necessary measures to ensure that the endfinancing amount is reflective of the true value of the property and adopt responsible lending processes. HBA also calls upon BNM to ensure that all banks in Malaysia will adhere to the BNM guidelines with end-financing based on net discounts and rebates even as some banks continue to close both eyes when they deal with this rebate issue.
Movement Control Order (MCO) Sales bargain?
The Covid-19 pandemic is expected to take a heavy toll on the property sector and property developers are expected to give massive rebates to entice house buyers — even to the extent that certain developers were reported to have guaranteed “One Proton for every unit of one property bought”. Hence, more stringent action is required for this critical
stage. Otherwise, the banking industry will be saddled with property loans that are not reflective of their true value.