SINGAPORE: The Malaysian government’s decision to grant lending licences to property developers could add to the risks associated with rising household debt, says Fitch Ratings.
The scheme is likely to encourage unregulated lending to households with weak financial profiles, and could undermine the strength of the financial system if not implemented prudently.
Tan Sri Noh Omar, Minister for Urban Wellbeing, Housing and Local Government, announced on 8 September that property developers could now apply to his ministry for a licence to make housing loans worth of up to 100% of a property’s value. Noh emphasises that the move will provide an additional financing source for borrowers who may not qualify for a bank loan. Cabinet was briefed on the programme on 14 September, after some members expressed reservations.
Noh reported afterwards that he had been asked to adjust the plan to avoid its misuse, but it is not being abandoned. Several developers have already been given the licence, says Noh.
Lending by property developers will fall outside the purview of Bank Negara Malaysia (BNM), which means that it will not be subject to the same level of scrutiny, risk management and underwriting standards as lending by the banks. The scheme also runs counter to measures introduced by the central bank over the last six years to rein in the rise in household debt. In January 2014 BNM banned the developer interest bearing scheme (DIBS), which allowed homebuyers to put down a small amount upfront and pay the rest upon completion. The programme appeared to have stoked property speculation.
Since 2010, BNM has also introduced property gains taxes for properties sold within five years, raised the maximum loan-to-value ratio, and reduced the maximum tenure for residential mortgages and personal loans. Fitch believes macro-prudential tightening has been largely successful. Household debt growth eased from a peak of 16.8% in 2011 to just 7.3% in 2015 – the slowest in eight years. The composition of new household loans has also improved: lending by the unregulated non-bank sector has cooled more than lending by banks, while growth in unsecured consumer loans has slowed more than mortgage lending.
Nevertheless, household debt is still rising and is high by regional standards, at around 89% of GDP. Leverage ratios are particularly high among lower-income households. For example, those earning less than MYR3,000 per month have debt equivalent to around 7x their annual income, compared with 3x among higher-income households. It is precisely those households with weaker financial profiles and poor access to bank loans that are likely to be targeted by developers.
Moreover, developers have been told they can charge interest rates of up to 12% on loans backed by collateral, and up to 18% on unsecured loans, compared with an average home loan rate of around 4.5%. Many households could struggle to service loans at such high interest rates. The systemic risk posed by the scheme will ultimately depend on the willingness of property developers to take part, and on the market’s willingness to fund developers. Large developers are likely to be cautious.
They have no access to credit bureau data, which will make it difficult to assess the creditworthiness of borrowers. Furthermore, their core business has proved profitable in the last few years, and any move into lending would leave fewer resources available for property development. However, weaker developers could be tempted to lend in order to ramp up property sales.