FOLLOWING a proposal submitted last week to the cabinet by Urban Wellbeing, Housing and Local Government Minister Tan Sri Noh Omar to allow property developers to lend to low-cost housebuyers through moneylending licences, the government has asked the minister to go back to the drawing board and to come back with a better policy proposal.
The great and the good have lined up to warn about a potential subprime Armageddon exacerbating a domestic household debt burden, which is already one of the highest in Asia, or if the financing model takes off, it could give a much needed boost to the housing market.
CIMB Group chairman Datuk Seri Nazir Razak thought it is a “dangerous idea” and warned in an Instagram post that “more unregulated lenders and subprime borrowers will compound the risk of a debt crisis”.
The Real Estate and Housing Developers Association (Rehda), on the other hand, has welcomed the proposal.
The sentiment behind the proposal is understandable, but the structure seems to be hastily thought out.
According to Rehda data, in the first half of this year, association members sold 39 per cent of new units compared with 52 per cent in the second half of last year. The reason for this, says Rehda president Datuk Seri F D Iskandar, is the issue of financing — the housebuyers simply don’t have the capacity to find the margin of financing.
This is surprising, given that Malaysia is arguably one of the most subsidised economies in Asia (especially for low-cost housing subsidies), if not in the world outside the Gulf Cooperation Council countries.
The Urban Wellbeing, Housing and Local Government Ministry, for instance, currently has in place five schemes of subsidised housing finance.
These include the 1Malaysia Maintenance Fund, to help finance maintenance of low-cost flats; Housing Maintenance Programme, a housing maintenance programme for low-income groups; My First Home Scheme, a private affordable housing scheme under which private developers get a subsidy of RM30,000 per unit; People’s Housing Programme for relocation of squatters into low-cost housing; and, the Transit Home Programme.
Adding another scheme may not strike as something out of the ordinary. But there is something Dickensian about giving moneylending licences to property developers, whose instinctive aim is to maximise profits irrespective of who they are selling to. Moneylending and housing finance simply are not natural bedfellows.
The proposed 18 per cent interest rate for the lending scheme for those with no collateral (12 per cent for those with collateral) is excessive for a hapless customer already hit by various Goods and Services Tax increases. It also goes against the ethics of helping the poor. Does this also imply that there is no syariah-compliant alternative?
There is also some confusion as to who the ultimate regulator of the scheme would be.
Will it be the ministry or Bank Negara Malaysia, the central bank? Given that the purchase of a house is the single largest and longest debt exposure of most ordinary people, is the Money Lenders Act 1951 the best legal and regulatory vehicle to mitigate the current quandary of unsold affordable housing units of developers?
The legislation was not designed for purchasing a huge and encumbered asset such as a house. What would be next — allowing pawnbrokers under an Ar-Rahnu Scheme, for instance, to lend against the family silver and jewels to cover bridge financing for a house purchase?
Given the vagaries of the housing market the world over, especially artificially-induced house price inflation and the difficulty of first-time buyers in getting onto the property ladder, it is the duty of every self-respecting government to ensure that sanity exists in the sector.
Relying on the market alone led the world to the subprime crisis and the near-collapse of the global financial system due to a spate of lack of oversight.
This has to be done through creative interventionist policies, which do not unfairly infringe the basic principles of supply, demand and competition. At the end of the day, it is all about protecting the low end (Malaysians call it the B40) of the market and about closing the growing inequality gap between the rich, the middle classes and the poor.
Malaysia has one of the best-regulated markets in the world for housing finance offered by the banking system and non-banking financial institutions regulated by Bank Negara.
What Noh and his team should be concentrating on is streamlining the existing schemes and coming up with a workable alternative.
If he persists with his current idea, it could pose a reputational risk not only for the Malaysian housing sector, but the economy in general.
RAM Rating Services Bhd has already said the proposed scheme would have no impact on the local sector, let alone precipitate a housing boom as developers suggest.
Given the state of the Malaysian economy, where projected gross domestic product growth has been reduced to between four and 4.5 per cent this year due to the ongoing impact of low crude oil and commodity prices, banks have been reluctant to lend to customers.
According to Bank Negara, the mortgage loan rejection rate by banks in January this year hit 61.7 per cent, improving slightly to 57.3 per cent in July.
This does leave buyers, especially first-time ones, in a quandary and increases the propensity for them to migrate to developers for financing. This would be an unfortunate and dangerous development for Malaysia given that the regulatory oversight is at best still a work in progress and that many of the developers do not possess the financial structuring expertise.
There are of course successful non-bank housing financing schemes that could serve as a model.
These include the Toronto-based Islamic & Ansar Cooperative Housing Corporation, one of the oldest and most successful ones operating since 1981. In the United Kingdom, Housing Associations and Credit Unions have also successfully contributed.
There is nothing wrong with developers offering mortgage finance. But not on their own, simply because they are not financiers; they do not have the expertise and the scheme can be abused especially for off-plan units if regulation is lax, as had happened in the real estate markets in Dubai, Qatar and Kuwait in the past.
There are several successful precedents where developers have teamed up with AAA-rated partners to offer finance for affordable housing. In Saudi Arabia, for instance, there are the Saudi Home Loans Company (SHLC) and Deutsche Gulf Finance (DGF), both licensed Islamic mortgage finance companies.
SHLC, established in 2007, boasts shareholders such as the International Finance Corporation, the private sector funding arm of the World Bank Group, Arab National Bank, Kingdom Installment Company and Dar Al-Arkan Real Estate Development Company, one of the largest housing developers in Saudi Arabia and a regular issuer of sukuk. SHLC was designed to promote home ownership by making housing finance more available and affordable for the country’s middle- and lower-income residents.
DGF, launched in 2010, similarly is a joint venture between Deutsche Bank AG and a group of Saudi investors led by Fahad Abdullah Abdulaziz Al Rajhi, including real estate developers.
A third housing development venture is Anfal, in which Maybank has a stake together with the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank Group.
ICD has teamed up with partners, including the Saudi Public Investment Fund and Capitas Group International, to launch Bidaya Home Finance Company to provide mortgages for Anfal’s housing portfolio.
The above approach is meaningful, sustainable and readily regulated. By coming up with a similar scheme, Noh could set a new road map for Malaysian developers to be involved in sustainable mortgage financing right across the customer spectrum — low-cost and beyond.
It could also be a warning to banks not to be fair-weather friends by upping the competition in housing finance provision.
Equally importantly, such mortgages could also attract the attention of Cagamas Bhd, the National Mortgage Corporation of Malaysia, which promotes wider house ownership and growth of the secondary mortgage market in Malaysia through mortgage securitisation, thus freeing up money in the system to fund mortgages at a reasonable cost.
The writer, Mushtak Parker an independent London-based economist and writer. He can be reached via mushtakparker@yahoo.co.uk