Luxury homes glut can wreck the economy

A property expert says there's a danger of a financial crisis.

PETALING JAYA: A property expert has called for the introduction of measures to encourage foreigners to buy up luxury houses in the secondary market, that is, houses that have been completed.

In an interview with FMT, Ernest Cheong said such measures were necessary for the prevention of a collapse in the property market, which could in turn ruin banks and trigger a financial crisis.

“There are many homes costing above RM1 million which have been completed, whether owned by speculators or unsold, and which the vast majority of locals can’t afford,” he said.

“If they are not sold, the banks can’t recover loans given to property buyers and developers. If that happens, the banks will lose a lot of money, which may lead to a collapse of the economy.”

Early this year, a news report said data from the National Property Information Centre showed an increase in unsold residential homes in Kuala Lumpur valued at above RM1 million in the first quarter of 2015 compared to a year before. These surplus units were worth about RM158 million.

Cheong said more developers, especially in the Klang Valley, Penang and Johor Bahru, were continuing to build houses costing more than RM1 million, adding to the surplus.

“The authorities need to stop giving approval for the development of high-end residential properties and approve only houses costing below RM250,000,” he said.

He said RM250,000 should be the maximum price for an affordable home to ensure people weren’t burdened with big housing loans.

EPF figures indicate 89% of Malaysians earn less than RM5,000.

“The repayment for even a RM250,000 housing loan would be around RM1,000 a month, a sizeable chunk for someone earning RM5,000,” Cheong said, adding that most potential house buyers would also have to factor in the cost of living and study and car loans.

He noted that a Rehda (Real Estate and Housing Developers’ Association Malaysia) survey covering the second half of 2016 showed 52% of unsold units launched during the period were in the RM250,000 to RM1 million price range.

He urged the authorities to ramp up their affordable housing initiatives in the interest of Malaysians.

Returning to the subject of luxury properties, Cheong said their prices would eventually drop if they remained unsold.

“If they drop by 20% or 30%, that is still okay, but the moment they drop down to RM200,000 or RM300,000, then Malaysia will have a problem,” he said.

“Sure, some will hope this happens so they can buy the properties on the cheap, but it comes at a cost to the nation because when the speculators or developers can’t settle their loans, it will affect the banks and there will be a domino effect on the economy if the government bails out the banks.”

He said such a scenario was possible because Beijing’s capital controls had made it difficult for Chinese nationals to buy million-ringgit homes. Many of these houses are targeted at Chinese buyers.

“We have to fill this vacuum left by the Chinese, and only non-Chinese foreigners can do this because locals can’t afford homes above RM1 million.”

It has been reported that China’s capital controls may cause difficulties for the Forest City project in Johor. Its China-based developer, Country Garden Holdings, closed all sales centres in mainland China when the controls were enforced.

Houses in the project, accounting for a gross development value of RM400 billion, are to be built on four man-made islands covering 1,385.6 hectares.

Alan Ho, a former sales agent at Country Garden’s Malaysian operations, has said that about 90% of Forest City buyers are from China.

Cheong said the authorities would have to relax some regulations governing the sale of property to foreigners.

“As an example, if the foreign buyers are willing to pay cash for a home above RM1 million, then perhaps the authorities can remove levies, place fewer restrictions on minimum prices of properties or be more liberal with the conversion of Bumiputera lot units.”

State levies

Penang and Selangor have imposed on foreigners a higher minimum purchase price – RM2 million – for landed properties or properties with individual titles. They also impose a state levy of 3% on properties while Melaka and Johor charge a 2% state levy.

Cheong said the relaxation of regulations should apply only to foreigners buying homes with cash and seeking properties in the secondary market. “We would thus avoid a repeat of the issues Forest City is facing while ensuring the foreign buyers are helping to resolve the glut of properties rather than adding to the problem.”

He said the authorities, while encouraging foreigners to buy unsold luxury properties, must protect the interest of low-income Malaysians.

Anthony Adam Cho, a former chairman of the Malacca chapter of Rehda, said the crux of the problem wasn’t the price of houses but the inability of people to get loans.

He told FMT the prices of properties were driven by market forces and if home owners or developers with properties priced above RM1 million couldn’t sell the units, they would naturally reduce the prices.

He said this was already happening in many urban centres, but the main stumbling block was the banking industry’s stringent lending rules. These rules didn’t take into account income that wasn’t declared, he added.

Last April, a news report quoted a property consultant as saying property owners in the Klang Valley, Penang and Johor were lowering the prices of their properties by up to 30%.

“There are many young people whose parents help them out with their bills,” Cho said. “Their children can’t earn enough to qualify for a loan and their parents may be too old to apply for one. In this case, the banks should allow two-generation home loans.”

He also said there were hawkers and those working commission-based jobs who could afford homes but who did not qualify for loans because they didn’t have documents to show a consistent income.

He added that the property development industry contributed to 144 downstream industries and was therefore a strong contributor to the nation’s gross domestic product.

“Aside from people like architects and contractors, there are other people who benefit from property development. Even nasi lemak sellers benefit by selling food to construction workers and this in turn benefits food suppliers.

“So, if we want to help the economy move, we must make it easier for people to own homes because if we can’t sell homes, then we can’t build more homes.”

Cho said Malaysia’s growth rate meant that the country would require more than 250,000 new houses a year.

“Without continuous building of homes, the prices of houses will continue to escalate due to higher demand and lesser output,” he added. -FMT