More Measures to Boost Transparency in Property Sector
The National Housing Department
(NHD), which comes under
the purview of the ministry,
implemented a new condition
effective Nov 15.
It will not grant developers a
housing development licence or
an advertisement and sales permit
if a project has ICS elements.
Incidentally, a developer must apply
for an advertisement and sales
permit in order to sell a project.
Because of this statement, Bank
Negara issued that circular to
ensure co-ordination between the
different authorities.
Bank Negara Malaysia
When the measures with regards
the property sector were unveiled
in the Oct 25 budget, developers
and house buyers viewed them with
confusion.
There were essentially three issues –
a more stringent real property gains
tax (RPGT) compared with previous
years, the banning of Developers
Interest-Bearing Scheme (DIBS) and
increased transparency imposed
on developers who now have to
display detailed sales price including
benefits and incentives such as
legal fees exemption, cash rebates
and free gifts. In short, the net price
minus the freebies.
While the RPGT is a straightforward
tax on gains upon disposal, property
professionals and developers felt
the ban on DIBS would result in
other forms of marketing strategies.
A check with a couple of developers
reveal they have replaced DIBS with
other schemes. The new schemes
– developers interest subsidisation
schemes and developers interest
rebate schemes, to name two –
requires buyers to pay the interest
first.
The developer reimburses the buyer
for the interest paid on submission
of receipts on a periodical basis;
every quarter, for example.
By whatever name it is known,
interest is still factored into the
house price.
Last week, a circular by Bank
Negara to financial institutions may
have put paid to such marketing
strategies.
The circular Measures to Promote
Sustainability of the Property Market
tackles the issue of lending on two
fronts. It targets both house buyers
and developers.
It prohibits financial institutions
from lending to individuals and nonindividuals buying a property offered
under an interest capitalisation
scheme (ICS), or any permutations
thereof.
Second, it prohibits financial
institutions from granting bridging
facilities to finance a development
that offers ICS.
ICS is a generic term which covers
any schemes in which interest is
capitalised, or imputed into the
price of the property. This measure
by Bank Negara can be viewed from
different fronts.
First, it is part of the mechanics of
putting the budget measures into
operative mode.
Second, it is an outcome of the
government, the central bank
and the various agencies coming
together to ensure compliance. Its
single aim: to ensure sustainable
prices.
That circular came about as a
result of a statement by the Urban
Wellbeing, Housing and Local
Government Ministry dated Nov 15.
“This measure is taken to enhance
the ability of the people to buy a
house and to ensure stable home
prices and also to curb speculation.
In addition, speculative activities also
have an impact on house prices.
This situation may adversely affect
the property market in the long run,”
the NHD statement said.
To comprehend how ICS rises
prices, one must view the workings
of this mechanism from a big picture
perspective.
Properties, whether landed or highrise condominiums, are launched
in phases. There is generally a
10%-15% price increase with each
subsequent launch.
If there are 100 units to be
launched, a developer may launch
50. If the demand is good, it may
launch the remaining 50 the same
weekend, with a price increase of
10% to 15%.
At around that time, developers
also gave freebies in the form
of price discounts or rebates,
free air conditioners, free first
year maintenance and legal fee
exemptions. Developers did not
display the net value of the property.
As we all know, there is no free
lunch. T
he cost of these freebies have
already been factored into the
house price. Over the years, this
gross value was used in the sales
and purchase agreement and in
determining the LTV ratio.
This practice of using the gross
value tends to inflate prices over the
longer run. These gross numbers
are recorded by the National
Property Information Centre
(NAPIC).
This result is a distortion of property
values over time, This call for
transparency ensures that NAPIC
has access to the net and true value
of the properties. This is important
for valuation of the property sector
on a longer term.
In the event of a foreclosure,
complications arise because the
price includes freebies. Therefore,
this ruling by Bank Negara must
be viewed positively. It will help to
bring down household borrowings,
bring about banking stability and
transparency when it comes to
record-keeping purposes.
Factoring interest into the cost
of the house raises prices within
a short span of time, especially if
demand is strong. Initial buyers will
be happy because they perceive
their property has “increased in
value” in a span of a weekend.
Further to this, the Bank Negara
circular also raised the subject of
the loan-to-value ratio.
In 2010, those who buy a third and
subsequent property have to pay a
30% down payment, what is known
as a loan-to-value (LTV) ratio of
70%. This 30% was supposed to be
calculated on the net value.
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