Let me say that I think the concept has a lot more merits than the current 'reception' is willing to give it. I am not aligned with anyone or any company dealing with this business segment.
It is very important to note the group of people that the concept is targeting: FIRST HOME BUYERS. More specifically, first home buyers who are having problems buying the said property. It is not for anyone else.
Issues that I have against the concept:
a) Tough for the funders - The 5 year lockup period will actually stave off speculation or that the funders side will get a hefty return on their investment at the expense of first home buyers. In fact, in there is no interest paid to funders, its actually quite a sad deal for the funders.
The funders pay 80% of the property, for what? For a maybe/potentially/ yes-no 20% gain after 5 years. If you put your own funds in a savings account, 12-month automatic rollover, you could get 3% compounded over 5 years = 15.9%. Hence 20% versus 15.9% is nothing to shout about.
Even if you compound it at 2.5% over 5 years = 11.3%. The 20% return is not guaranteed. Funding the project also means you have to take a view on the local property market.
Developers do not get 100% of purchase price but rather just 80%. The 20% is granted to developers only if the property rises above the purchase price at the end of 5 years. Otherwise the 20% will be earning a 5% p.a. and used to protect the downside for investors.
b) Saving the developers - We know we have a lot, a bloody lot of properties that are unsold. If nothing is done, the markets will unwind itself eventually - either developer keep dropping prices till it reaches real affordability levels, or it keeps the properties on their books till the sentiment recovers or the cows come home (bankruptcy).
The latter has the consequence of suppressing the rest of the property market in terms of prices. The sad fact is that too many Malaysian households have taken on hefty property mortgages. In a flattish or slowdown market, these households will have to crimp their spending or even sell additional properties at a loss.
The Fund My Home project will "save" many developers from "losses" as cited above or eat into their capital for having to keep the properties on their books.
They have overbuilt for sure, they have overestimated the demand and affordability, and in a neutral stance, they have to bear the downtrend and their business mistakes.
While the Fund my Home project has a lot of merits, I do not wish to see first time home buyers being too eager to snap up "substandard" properties that developers cannot sell. To a certain extent, that concern has been mitigated by the "screening process" by TheEdge team. Not all properties will be permitted on the platform.
Why protect the buyer and not the seller? Because we are not here to save the developers. As a matter of fact, we are already helping the developers to sell properties that they themselves CANNOT sell. Hence the developers should not be looking at normal profit margins (judging from the fact they made so many business mistakes such as overbuilding, overestimating demand, etc.).
The bulk of pain has to be shouldered by the property developers, as explained above.
c) What if the buyer defaults - The developer is supposed to take back only 80% of the property price at the beginning. The remaining 20% will be kept as minimal returns for investors in the home. Hence the funders are protected even if the property were to lose 20% of its value at the end of 5 years.
However, say within that 5 years the buyer lost his/her job and the property at the end of 5 years has a market price that is 40% below the initial entry price for the buyer? The buyer basically is bankrupt now, so at 40% loss, no party will want to sell into the market. Who bears the additional 20% losses?
d) EPF Account B - Currently Account B takes up 30% of our contributions. I assume first home buyers will be drawing down from Account B to help with the initial 20% payment. I think the government can make the exception for first home buyer to take out the full Account B plus an additional 20% from Account A (if required) for the project. Seriously, its the 20% payment that will be the biggest hurdle. Plus the same person is building equity and not speculating. Same as before, if they were to sell the property, they will have to put back the same sum back to their EPF account.
THE BENEFITS
a) First time home buyers can almost forget about owning a home on a RM4k-5k salary. Hence FundMyHome should be weighed AGAINST the alternative of renting. I need not do a Renting vs owning 101 course here to highlight the miniscule difference to participating in the program vs renting. Or do I?
Say you cannot afford the 20% down payment but you have a salary of RM4,000. The platform will help to try secure a RM100k personal loan. Say the interest payment is 7%. The person would be paying interest RM7,000 a year = RM583 a month. Assuming nothing changes, RM583 in rent cannot even get you a room at Choo Cheng Kay flats. But the family gets a house/unit all their own now.
Even if at the end of 5 years, you decide not to take up up the remainder, you can still sell your 20%, assuming market was flat, and get out. But you got a silly RM375 rental a month for a nice home for 5 years.
b) Catch up - The worst thing for first home buyers is not being to catch up to the property prices. Imagine waiting for your household income to jump from RM5k to RM10k a month. Maybe it will take 5 years but where will property prices be then. Your RM400,000 unit may now be at RM550,000.
You can do the math yourself that you have bought insurance for your affordability. Giving up the initial 20% is not such a big deal, as I have explained that the funder's side have their risks and rewards to be weighed out as well. In this case you are giving up RM80,000 gains and could refinance for the whole unit/house for RM400,000 - RM80,000 (initial payment) + RM80,000 (funders' returns) = RM400,000.
You will be financing a mortgage of RM400,000 at the end of 5 years for a property that is worth RM550,000. Giving you an equity of RM150,000 already.
c) EPF Account B - After 5 years, the same person with RM4k salary, assuming no increase, would have saved 11% +13% (contribution) = 24% of RM4,000 x 12 x 5 = RM57,600. Thirty percent would have gone to Account B for housing = RM17,280. That amount could be used to pay down further or refinance purposes.
We should allow another 20% from Account A for this purpose, which would have made for a total of RM28,800 at his disposal.
MY VIEW
Overall a brilliant idea that tries to balance the risk-return for the interested parties.
If the team stay vigilant on the screening process of properties allowed to be on the platform - this will succeed wildly. This proposal should get full support from the government, and property developers should be thankful. Those making noises are those overpricing their substandard properties and probably lamenting why they cannot get on the platform.
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