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Very Good Proposal By Bank Negara

There is apparently a proposal by Bank Negara to change the way mortgages are calculated, which will greatly reduce the amount the public can borrow. The computation is supposed to be based on net income and not gross. That could reduce the amount that can be borrowed by 37%.

I think its an excellent idea. The only people who think this is bollocks are those with 2 properties or more. The affordability ratio has gone through the roof. Some may argue that a hike in real property gains tax would be a better move - I think not as it takes more than lesser profits to calm the property markets.

Property rides on expectations. If everyone expects prices to rise in the foreseeable future, its get in now or forever they will be out of your reach. That is the dangerous potion brewing in Malaysia and many Asian property markets. That kind of expectation has be neutered.

When you take things too high, the fall be greater, remember 1993-1997, the swath of liquidity just kept getting bigger and bigger. Just remember that when liquidity is sucked out of the system, you get a corresponding deflating effect, in multiplier effect.

Why property prices needed to be eased down? A survey done by The Edge on housing affordability saw property prices increasing from 5.9x income in 1989 to 10.9x in 2010. Left unchecked, it will soon climb to 15x your annual income.


The Global Property Scam

 A massive transfer of income to the very rich has occurred while middle class real incomes stagnated. The middle classes only tolerated this because Central Bankers created housing booms to keep the impoverished middle classes borrowing and spending to give them the illusion of prosperity and stop them from revolting.

How do you do that? You do that by keeping interest rates very low, keep printing money, keep the system very liquid - some have gone to equities but by and large the biggest beneficiaries have been property markets throughout most of the world. Yes, you see obvious bubbles in Singapore, HK, parts of China, Canada, Australia and even certain places in Malaysia. We thank our lucky stars that our property markets did not go through the same correction as the major developed nations - but is that because we did not have a massive contraction in liquidity brought on by a financial scare?

How is this scam hurtful? Well, you propel property prices higher and higher with low interest rates and excess liquidity. It serves to fan the flames of property prices higher, causing a bull run for the prices, causing people to chase and get some action before its too late.
Its never a zero sum game. Much of the froth in pushing prices higher has to be in much much bigger mortgages that people are taking to participate in the run. As long as the public can pay down their mortgages, you won't see foreclosures or a major correction. You and I know that prices have basically gone out of reach of the young and working.

We must applaud Zeti to have the foresight and strategic thinking to tackle this before it gets out of hand. Property owners may sigh and bitch but seriously, there is a price for everything - imagine the price of sugar and flour rising 10x, putting them out of reach of at least half the population. Nothing good can come from that.

Its not that property prices cannot be rising, they are actually a critical wealth builder and saving device for many families. Ask most people, all they are looking for is a few percentage gain a year over the longer term - when its nearly double digits every year for a few years, you know something is out of whack.

While we cannot stop people punting and chasing for homes to buy, we can at least address the amount of leverage they get. If Malaysia's average credit card debt per household gets to the RM80,000 or RM100,000 level, you cannot tell me that is not a problem. Why is it when its property loans, its your business only and not the government?


William Wang said…
The biggest culprit to inflation on house property is speculation and if we can agree on this then all elements that contribute to it must be eliminated. Somehow our MCA minister on housing is full of hot air during downturn, with a glut of abandoned houses and of course victims. Attempts were made to prevent this from happening in future. The most obvious and hotly debated was built & sell concept. Do we still talk about it now? What happened to all the victims who had cursed & sworn at our housing policies, quite likely they are now again speculating on the oil train. Genuine buyers must have patience, it is just like stock, one buy only if one can get reasonable returns and this, I do not mean capital appreciation but dividend return and a return of less than 3% is just not worth your risk.
Mr ICICI said…
nothing better than to see more zwt pictures on such a gloomy market day.
clearwater said…
I think it's a belated response by BNM to the household debt bubble. Should have nipped it in the bud at least one year earlier before the banks went way overboard lending on properties and credit cards. Now more than half of bank loans are to consumers. Scary scenario should there be a sharp economic slowdown. Better late than never, I suppose, but the seeds for a contentious bust are already sown. Hoping for a soft landing.
Bonescythe said…
Never be wrong with Cica Zhou :)

Choon Kiat said…
Good and bad from this new BNM guidelines. It may help to cool the soaring prices of properties but it may also hinder genuine prospective house buyers from getting loans from banks, particularly first time buyers.
SlowMo said…
I do not think that it will hinder genuine prospective buyers from getting bank loans... for first time buyers they can only now purchase houses that they can really genuinely afford.
easystar said…
@SV - Probably too late now as from the past experiences:

(a) Japan central bank (1990) tried to dampen its property bubble and things just fell off the cliff.

(b) Fed raised interest rate towards 2007 to control the property bubble - all things fell apart.

I am totally astonished by the fact that people seem to learn - even after the largest (and housing driven) financial crisis in the world.

Housing speculation is also partly driven by inflation expectation (as it is an real asset) and BNM has to tackle that as well.
Alex said…
I'm wondering, would this proposal make developers offering smaller buildup to make it 'affordable' to the new buyers?
Choon Kiat said…
There would be some 1st time buyers who might qualify under the existing bank guidelines but may fail under new guidelines which are more stringent in calculation of debt service ability. These new buyers who would be able to service their commitment in 2 years time when they take possession of the house due to pay rise and so on are being deprived now under new guidelines...
ronnie said…
Dear Dali,

Your proposal to short KNM a couple of months back was spot on. Kudos.
Bonescythe said…
Proposal might be nice, but the demand will still be there. KL property prices, if compared to the ones in Singapore, Bangkok, Japan, Beijing, Shanghai.. KL still have lots of space for it to shoot up.
ASHORE said…
For your info, the meltdown has already begun subtlely 6 months ago where the shrewd money gradually pared down their property holdings....but the peak of the meltdown will mostly likely be felt just befre the GE where the capiltal fligh tto safe haven(politial) will be heaviest.
hishamh said…

From the data, the ratio of household borrowing to total loans has not moved much since the end of 2005. And over the past couple of years, mortgage and credit card lending has lagged corporate borrowing (loans+bonds).

But Ashore is right - the market's already softened. Any new measures will just slow down an already slowing market.
ru40342 said…
Excellent written article. Totally agree with you. With almost 70% household debt to GDP ratio, we are not far away from PIGS nations.

Furthermore, systematic and unsystematic risks are not determined by average house buyers in getting loans from banks. BNM is getting rid of subprime borrowers.

Net income basis actually reduce the risk of housing market and in the long run, risk of sharp contraction in economy. What's wrong with that? said…
Let the market cool but not freeze. BNM has to find a pivot point and it looks pretty much they have something up their sleeve. Hopefully...

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