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?