Of speculators and bogus house buyers

Immediate government measures are needed to tackle issue

“Harga Rumah Melampau” – that’s the desperate cry of the rakyat against skyrocketing house prices as headlined by one of the widely-read Bahasa Malaysia newspapers. In English, it translates to “House prices are ridiculous”.

The National House Buyers Association (HBA) has consistently called for government intervention to prevent a “homeless generation of young adult Malaysians” from emerging, especially in urban and sub-urban areas, who, if not for wild speculation, would be able to buy their own houses.

In time, Malaysia will face a “social crisis” with serious political implications if the majority of the lower and middle-income groups do not have affordable houses.

The matter is of grave urgency because the homeless hail from the lower middle class, usually graduate couples or the self-employed earning reasonable income and expecting to buy a house to commence their family life in a fixed abode.

In the Government’s drive to home ownership, low stamp duties have been imposed to encourage first-time house buyers to own a house.

But speculators have taken advantage of this to accumulate multiple properties and manipulate property prices with conniving cash-strapped housing developers. There are three types of purchasers, namely:

> Necessity: Those who buy out of need (owner-occupied),

> Precautionary: Those who buy to hedge against inflation and for long-term investment, and

> Speculative: Those who buy to “flip” and make money against everyone’s interest except their own.

This is a “ticking time bomb” and immediate government measures are needed. The government needs to take proactive measures to stop the steep rise in property prices due to false demand and excessive speculation fuelled by easy mortgages and the low Real Property Gains Tax or RPGT.

The less affluent, who constitute the majority of the population, have been marginalised, with those having more than others accumulating property far in excess of their needs. Urban Well Being, Housing and Local Government Minister Datuk Abdul Rahman Dahlan in his keynote address at the recently concluded 16th Housing and Property Summit reiterated: “Of greater concern is the fact that income growth has not been keeping in tandem with the increase in house prices.

Data from the Department of Statistics Household Income Survey, 2012, shows that approximately 80% of Malaysians are earning below RM6,954 per month. Based on the credit line of 30% of the net income for housing loan, at the current Base lending Rate (BLR) of 6.60%, the maximum price of houses which can be afforded by this group (ie, 80% of the population) is only those costing RM300,000 and below.”

The question is: What are the impediments to the success of a truly affordable housing scheme for the people?

PR1MA

The 1Malaysia Housing Programme or PR1MA is an important targeted government initiative with the promise of an affordable home for every couple that deserves it. The government’s main contribution to ensuring affordability is its land, which is a significant subsidy. It is necessary for the organisation to have a clear criteria on these affordable homes.

Already, there are some disturbing signs that the initiative may be petering out even before implementation. PR1MA has already advertised its products at RM400,000 (from the earlier RM450,000 that I had heard about!). With government land being made available, these prices do not reflect the “subsidy” element and are beyond the reach of the intended income group.

It’s already priced too high for the majority of genuine house buyers. PR1MA is a noble idea, but is it being properly implemented? Are they building the right product, at the right place, with the right pricing and of the right numbers?

Even more unsettling is the invitation to private developers to build PRIMA homes and sell them under the PRIMA umbrella. Why? This adds a commercial profit element without any gain to the purchaser.

PR1MA will have to be a comprehensive and discrete regime in all aspects of house purchase; criteria for qualifying; build and sell; types of houses; the exclusion of commercial properties; the grievance redressal regime between purchaser and PR1MA; controls over sub-sale, and of course, appropriate sanctions for dishonesty in dealings with PR1MA.

Investors Club

The situation has been getting worse with the self-glorified “Investors Club” mushrooming in the housing market. They manipulate the property market through en-bloc purchases, say 100 to 200 parcels in stratified properties, with some nearly dominating 50% of housing units and commercial developments.

The modus operandi of the operators of such a club is to negotiate as block purchasers with cash-strapped developers and bargain for a pre-launch block discount of, say, 25% off the sales price. The operators then circulate amongst their members for a “bargain” early-bird discount of 15%, thus making themselves a 10% clean profit. The members of the Investors Club will subsequently dispose off their “wares” upon delivery of vacant possession at a further profit, especially in this current inflated property market.

Seminars like “How to become a billionaire” and “Invest in properties without deposits” will trigger young adults into thinking of shortcuts toward great riches.

Naive and greedy investors get enticed into such antics and are ready to be baited. You need to attend one of these seminars or conventions or whatever to understand more.

You could also surf the Internet and key in the word “Investors Club” to know their modus operandi and the names of the housing developers they are in alliance with and who participates in their “schemes”. There are instances when one needs to join as members at prices ranging from anything between RM300 and RM5,000 to enjoy a lifetime of free seminars and tips. Some are automatic members without having to pay.

There are different business models with some pooling their financial resources to buy bulk into a project, exiting together when prices go up and splitting the profits. It makes sense to developers who merely want to sell as many units as possible to attain the pre-requisite margin sales imposed by their banks or financial institutions (FIs) prior to the drawing down of their bridging loans.

Some banks or FIs impose a mandatory sale of 50% before loans are available for drawdown.

DIBS

In the developer interest-bearing scheme (DIBS), the developer bears the interest otherwise payable by the purchaser to the purchaser’s bank during the construction period. In other words, the purchaser doesn’t have to pay anything to his bank until construction is completed. The catch here is that the purchaser is committed to buying the house as in any Schedule G or H of the sale and purchase agreement. This is not a build-and-sell scheme although it is often passed off as such. The second catch is that the interest that the developer has been paying has actually been factored into the purchase price.

On top of this, should the project be abandoned, the purchaser would still be saddled with the purchase loan, the interest on it and an incomplete house.

In the event the developer cannot settle the loans he has taken, by charging the purchaser’s property, the purchaser’s house will be auctioned off.

The purchaser will still have to pay the loan he took, pay the interest and will not even have the incomplete house to look at!

DIBS is popular with speculators as they pay nothing to make a profit.

Their initial downpayment and deposits are sometimes factored into the purchase price by the participating developers, and some FIs do not even require that the developer collect the deposit that has to be paid by the so-called purchaser.

This is one of the factors making for “bogus” house buyers, who merely flip the property at the right time.

We hope that Bank Negara will come up with a policy change to curb DIBS. It is worth noting that Singapore had banned DIBS in 2009.

It has come to our attention that developers are already working on counteracting measures even before Bank Negara moves to implement anything.

After all, they are always one step ahead of the authorities.

Government initiatives and HBA’s proposals

The HBA was invited to present its 10 proposals to curb the escalation of house prices at the following recent forums: Budget Consultation, 2014 in Putrajaya chaired by the Prime Minister;

Providing Greater Access to Home Ownership chaired by the Deputy Minister of Finance II Datuk Seri Ahmad Husni Mohd Hanadzlah; and Initiatives to Reduce House Prices initiated by the Urban Wellbeing, Housing and Local Government Minister .

The government now seems to be serious about doing something. If it is so, then it has to make several hard decisions. The government must take immediate proactive steps to curb the uncontrolled escalation of property prices. Reducing speculation will translate into lower property prices.

HBA detailed proposals to raise stamp duties and the RPGT and the mechanism to lower the Loan-to-Value Ratio (LVR) as a means to stop price speculation, which has pushed property prices through the roof.

The three pertinent instruments amongst seven others that can be employed have been summarised in a table in the previous page.

Conclusion

Considering the deep pockets of property speculators, the effectiveness of these proposals remains to be seen, but, if passed, will make speculation unworthwhile.


> Chang Kim Loong is the secretary-general of the National House Buyers Association (HBA): www.hba.org.my, a non-profit, non-governmental organisation (NGO) manned by volunteers. He is also the NGO councillor at the Subang Jaya Municipality Council.