Why are home loans still pricing Malaysians out?

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Stricter lending policies have been implemented by Malaysian banks in recent times.

Stricter lending policies have been implemented by Malaysian banks in recent times.

For many Malaysians, owning a home is one of the pillars towards a successful life. It represents stability, safety and a foundation for the future. Unfortunately, a complicated web of problems involving the financing of home loans is making the road to property ownership treacherous.

Stricter lending policies have been implemented by Malaysian banks in recent times. This is the result of several interrelated factors such as the growing levels of household debt, worries about the sustainability of the property market and the initiatives taken by Bank Negara Malaysia (BNM) to support financial stability. More stringent regulations frequently result in increased down payment needs, more stringent loan-to-value (LTV) ratios (usually 90% for housing loans) and more scrutinised evaluations of credit scores.

Latest overnight policy rate

In a statement released by BNM on May 9, 2024, the Monetary Policy Committee (MPC) decided to maintain the Overnight Policy Rate (OPR) at 3%. Some advanced economies have seen a slowdown in the rate of disinflation, even as headline and core inflation globally have been trending lower in recent months. 

The growth outlook is still vulnerable to negative factors, primarily from the continuation of geopolitical tensions, unexpected spikes in inflation, and volatility in international financial markets. The most recent data for the Malaysian economy indicates that robust domestic spending and a strong increase in exports will drive increased economic activity in the first quarter of 2024.

As for inflation, headline and core inflation averaged 1.7% and 1.8% in the first quarter of 2024 respectively and is expected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures.

Past housing loan patterns

Delving back to the era before Covid 19, household demand for bank loans increased as a result of the environment in which banking institutions' loan interest rates remained low. Malaysians were drawn to take out housing loans at an OPR of 1.75%, the lowest rate decrease in history since the third quarter of 2020 ending on July 7, 2020.

The total amount of housing loan applications that banks received in 2020 was RM194.4bil. Banks approved RM137.7bil in home financing during that same time period, or roughly 307,800 accounts. First-time home buyers receive 43% of newly approved home loans and by the end of December 2020, the average housing loan approval rate was 72%.

Unsold property backlog

The Malaysian Real Estate and Housing Developers’ Association (Rehda) has been a constant beacon for those struggling to purchase their first homes. "Financing is still a significant issue for developers and homebuyers. Developers struggle to secure bridging finance, essential for starting projects and face delays due to banks demanding a higher sales percentage before approving loan drawdowns. This translates to a backlog of unsold properties, with a significant portion falling within the affordable to mid-range category (RM400,000 to RM1mil), the very segment most sought after by aspiring homeowners,” said Rehda president Datuk NK Tong during a media briefing of the Rehda Property Industry Survey 2H2022 and Market Outlook for 2023.

According to the survey, the top three reasons for end financing loan rejection are ineligibility of purchasers' income, lower margin of financing supplied, and poor credit history. Tong said that 66 of loan rejections were in the RM700,000 and below price category. Meanwhile, for 14 of the 119 respondents, the rate of loan rejection over sales for residential properties was greater than 50%.

Settling for less

Saving a sizable down payment is a difficult endeavour because of the rising cost of living and the steadily rising value of real estate. Stricter LTV ratios may limit the maximum loan amount that eligible individuals can obtain, compelling them to settle for smaller or less desirable properties, even for those who are able to save.

No help at all

The primary problem with fixed-rate mortgages is the initial large down payment that is necessary. When compared to conventional loans, shariah-compliant financing options may have more stringent eligibility requirements or higher profit-sharing rates. Further limiting options for individuals who are finding it difficult to break into the conventional real estate market is the scarcity of government-backed affordable housing loan programmes and rent-to-own programmes.

More and more Malaysians are resorting to renting just to get by in a market oversaturated with mediocre yet overpriced properties. How are people expected to thrive with the constant burden of home ownership literally hanging over their heads?

Facilitating a more balanced market is a major responsibility of the Malaysian government, and so far their efforts have proven fruitless. A more diverse real estate market could be achieved by taking steps like expanding the supply of affordable housing, offering tax breaks to developers of such properties, and streamlining the application procedure for government-sponsored housing programmes.

This article was first published in Starbiz7.


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