The neglected secondary market risks collapse if the government and banks do not take immediate action, says consultant.
Like an orphan, the secondary market has survived the last six years without much support from the government or banks; on the other hand, the government has imposed more taxes to further put a brake on the market, says Dato’ Sri Gavin Tee, President of Swhengtee Group.
“Everyone is talking about the overhang or unsold units in the market but they are referencing only the primary market with units sold by developers. Meanwhile, the secondary market with units owned by individuals has completely been neglected in terms of incentives to stimulate transactions,” the property consultant added.
Tee lamented that since the cooling measures imposed in 2010 and several more in subsequent years, the property market has been experiencing a prolonged slump.
In November 2010, Bank Negara Malaysia (BNM) implemented the policy of a maximum loan-to-value (LTV) ratio of 70%, which is applicable to the third house financing facility by a borrower.
Tee believed the broader economy is soft due to many factors but in the case of the property market, “it’s the cooling measures that have a far-reaching dampening effect and is the main cause of the prolonged slump.”
He acknowledged that the government did try on several occasions in the past 2 years to help the property market, but “it’s not exactly helping the whole market”.
“The government is mainly helping developers to try to sell off unsold units but the cooling measures remain such as the Real Property Gains Tax (RPGT)’s higher rates and strict financing conditions. Hence, there is minimal impact on the overall market except for the first-time homebuyers market. At the end of the day, the government’s help did not have much stimulating effect.”
Tee highlighted the fact that despite the government’s noble intention to “rescue” the market, its policies have not helped the secondary market substantially. On the contrary, the policies implemented have adversely hit the secondary market, for example, higher RPGT which is applicable for longer periods, as well as the lowering of the LTV Ratio and the raising of the minimum purchase price for foreigners from RM500K to RM1 mil, and RM2 mil in some states.”
Prior to Budget 2020, the RPGT has been increased from the 6th year: from 5% to 10% for companies, non-PR holders and foreigners; and from 0% to 5% for Malaysian individuals and permanent residents.
The government also raised the stamp duty for transactions of properties valued above RM1 million from 3% to 4%. These measures had increased the entry and exit costs for property ownership.
Both of the above policies had the effect of rubbing salt into the wounds of an already bruised and battered market.
Under Budget 2020, the government slightly tweaked the RPGT rules by setting the market value on Jan 1, 2013, as the property acquisition price for properties acquired prior to Jan 1, 2013 compared to the previous base year of Jan 1, 2000. The minimum purchase price for foreigners had also been reduced to RM600K but is applicable only for primary market high rises in urban areas which have been unsold for over 9 months.
“The increase in stamp duty and RPGT have the effect of rubbing salt into the wounds of an already bruised and battered market.”
“Stimulating the secondary market has many positive economic multiplier effects without adding to the oversupply or overhang problem.”
“There is only one formula to selling your property in the subsale market today, that is, to sell it at the cheapest price.”
No supply increase
“In a mature market, the secondary market is the main driving force to achieving a healthy market. Due to the spike in approvals for housing developments in 2013/2014, the result is now a huge number of units in the secondary market being available. Almost every house owner is suffering as they have difficulty in renting out or selling their unit. As such, it is time the government seriously look into the secondary market,” Tee stressed.
Elaborating, the property speaker said: “Stimulating the secondary market doesn’t increase the supply of properties or add to the overhang. Instead, the increased transactions means more taxes collected by the government, while professionals like lawyers, tax consultants, real estate agents, interior designers, renovation specialists and furniture retailers benefit from increased business too. Hence, it has many positive economic multiplier effects without adding to the oversupply or overhang problem.”
The current situation does not favour the subsale market. Tee listed several obstacles:
1. The conditions for owners to sell are very restricted, for example, financing is much more difficult in the secondary than in the primary market. It is already considered difficult in the primary market as evidenced by the low loan approval rate. In H1 2019, the loan approval rate was 42.5%, the third lowest rate tracked by NAPIC since the first half of 2011 (See Table).
2. The valuation is very subjective, for example, while the primary market enjoys a good value, the secondary market is valued lower by 20% – 40%.
Tee further explained that there are 3 types of people in a quandary now in the secondary market:
1. Buyers who need financing but can’t get due to the overly strict requirements. Some of these buyers want to buy near their family members or relatives in matured neighbourhoods.
2. Upgraders (or downgraders) who are stuck due to the inability to sell. Some may have purchased the wrong type of property or in the wrong location so an adjustment for them is necessary.
3. SMIs/SMEs which need to relocate, upgrade or downgrade or adjust their premises to adapt to the new business environment. This is especially so in light of the disruption brought on by the digital economy. They too are stuck and can’t unlock the value of their property due to the restrictive financing.
Dire Consequences
Tee warns that if the government and banks do not help these groups of people, there is a risk that the stagnant market may collapse in a worst case scenario. This can adversely impact the wider economy and cause social problems. “A lot of SMEs/SMIs and individuals will face the prospect of restructuring, relocation of their business, and downgrading which doesn’t bode well for the economy,” he voiced out his opinion.
Tee also predicted that the economy will face major changes in 2020 due to digital disruption such as the coming 5G (within 2 years), and the globalisation factor, amongst other factors. The effects will inevitably filter down to the people.
As a result, he proposed the following measures to remedy the situation in the secondary market:
1. Government to lower property taxes, for example, stamp duty and RPGT;
2. Professionals to reduce their fees and charges such as cost of disposal, acquisition and move-in cost;
3. Government to impose minimal tightening of the shot-term stay market in order to promote the secondary market for tourism purposes.
The market needs a variety of unique accommodations to entice tourists who are looking for local stay experience;
4. Banks to review their restrictive lending policies; and
5. Government to allow conversion to commercial from residential use due to lack of suitability for residential. Local governments should try to assist on this.