By Datuk Mani Usilappan

As Malaysia consolidates its position as a regional economic powerhouse in 2026, the sheer scale of its property-related debt has become impossible to ignore. According to Bank Negara Malaysia (BNM) data, lending to the broad property sector reached approximately RM1.21 trillion by mid-2025, representing over half of all outstanding loans in the banking system. Within this massive portfolio, residential mortgages are the primary driver, anchoring the balance sheets of every major financial institution in the country.

However, this RM1.2 trillion foundation is built upon a premise of stable, verifiable collateral values—a premise that is currently under siege by the ugly practices of price mark-ups and engineered transactions.

The sales-credit divide

In the high-stakes world of Malaysian retail banking, there is an inherent disconnection between the marketing and sales department and the credit and risk department.

• Marketing and sales: Driven by quarterly targets and intense competition for market share, these teams often collaborate closely with estate agents and valuers to get the deal done. They are the primary requesters of indicative values, often persuading panel valuers to match a purchaser's target price to ensure the loan application is competitive.
• Credit and risk: Their mandate is to ensure the long-term safety of the bank’s capital. They rely on the final valuation report to confirm that the Loan-to-Value (LTV) ratio, typically 90% for first-time buyers, is backed by a tangible asset.

The danger arises when the marketing and sales department uses an indicative value to prepare loan documentation and obtain internal approval before a formal valuation is conducted. This imprudent commercial practice puts the credit and risk department in a difficult position, as they are often presented with a fait accompli where the loan has already been promised to the customer based on an unverified figure.

Understanding the 3 Cs in an engineered market

Lending institutions traditionally rely on the Three Cs of Credit to manage risk:

1. Capacity: The borrower’s ability to repay based on income and debt-to-income (DTI) ratios.
2. Character: The borrower's credit history and reliability such as his or her CCRIS and CTOS scores.
3. Collateral: The LTV ratio and the quality of the asset securing the loan.

In an environment of marked-up prices, the collateral pillar becomes an illusion. If a bank lends 90% on an engineered price of RM500,000 for a property actually worth RM400,000, the bank has effectively provided RM450,000 for a RM400,000 asset. This means the bank is operating at an effective LTV of 112%. In this scenario, the bank has zero cushion against market volatility.

The fallout: Who is responsible?

The true risk of price engineering is only exposed when a loan goes sour. When a borrower defaults, the bank’s recovery unit takes over to salvage the capital through foreclosure and auction.

In Malaysia, we do not operate on a true mortgage basis where the property's income potential (rent) is the primary security. Instead, we use the property as collateral for a charge. If the original valuation was inflated to facilitate a cash-back deal, the bank will discover during the auction process that the market value in their files does not exist in the real world.

When a bank suffers a loss because a foreclosed property fetches 30% less than its original valuation, the institution often sues the valuation firm for negligence. While the valuer is indeed responsible for professional accuracy, the question of contributory risk is increasingly overlooked and must be raised in 2026:

• On valuation integrity: To what extent did the bank’s marketing and sales divisions exert undue pressure on panel valuers to provide indicative valuations that conveniently mirrored the developer’s asking price, effectively bypassing the objective market analysis required for sound lending?
• On credit oversight: Did the internal credit and risk committees choose to overlook the obvious cash-back incentives and engineered rebates buried within developer brochures? Such red flags clearly signal an artificial inflation of the asset’s true collateral value.
• On the income-asset disconnect: Was the final loan approval dangerously skewed toward the borrower’s potentially overstated or unsustainable income levels, rather than being anchored to a conservative and realistic appraisal of the property’s actual worth in an open, competitive market?

Systemic risks and macroeconomic stability

With Malaysia’s household debt-to-GDP ratio currently elevated at 84.8% as of the first half of 2025, the banking sector faces a precarious tipping point. Any broad-based negative equity event, such as a correction in the property market which pushes house prices below the outstanding balance of the mortgage, would not only erode borrower equity but could trigger a systemic financial crisis as banks find their primary collateral insufficient to cover their massive loan exposure. Should a market correction reveal that thousands of properties have been fundamentally overvalued through engineered pricing, the resulting collateral crunch would severely stress the banking system’s capital buffers, potentially forcing institutions to tighten credit and triggering a liquidity contraction that could destabilise the broader macroeconomic landscape.

Banks must recognise that property-based lending risk is not just a financial risk; it is a property value risk. Ignoring the ugly practices of today for the sake of meeting 2026 sales targets is an invitation for a recovery crisis in the years to come.

This commentary is the third of a 4-part series contributed by the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector, Malaysia (PEPS). This contribution article was first publised in StarBiz 7. Part 1 and part 2 are linked here.

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