Concerns about rising household debt and the introduction of a goods and services tax (GST), which came into effect on April 1, are likely to contribute to a cooling in the residential segment of Malaysia’s property market.
However, the slowdown is partly seen as a welcome respite given the rapid expansion of mortgages and personal loans since 2008. Residential property prices have increased by 60% since then, according to the IMF, outpacing income and rental growth, with a corresponding surge in debt levels, particularly among young adults and low-income families.
As a result, measures have been introduced in recent years to curb the growth of household debt, with the implementation of the GST slowing appetite further. However, many think that this could be a temporary slowdown, with momentum expected to build again in 2016.
McKinsey Global Institute, the research arm of consultancy McKinsey & Co, warned in February that Malaysia’s household-debt-to-income ratio could heighten the risk of an economic crisis if the country’s debt levels prove to be unsustainable. The ratio reached 146% at the end of 2014, up from 139% in 2007, one of the highest levels in the region. Home loans made up the largest share of Malaysia’s household debt, accounting for 45.7% of the total.
The IMF has also raised concerns, noting in its latest consultation report on Malaysia that higher levels of debt owed on residential property represented a particular risk, with lower income borrowers more highly leveraged. The report, issued in early March, noted that 70% of all home loans had been taken out with variable-rate mortgages, meaning repayment levels could rise in certain economic conditions.
Data suggests that lenders have begun responding to growing concerns about the risks of high levels of exposure to the property market. Home loans are now falling, with more applications being rejected by the banks: loan rejections over sales rose by 7% from 2013 to 2014, according to the Real Estate and Housing Developers' Association Malaysia (Redha).
At the same time, the outlook for banks is weakening. In a note to investors issued on April 6, CIMB Equities Research said Malaysia’s banks will see slower loan growth this year, advising investors to cut their exposure to the sector.
Ratings agency Moody’s said in March that despite the banking system being well positioned to deal with a soft landing in property prices, delinquencies on mortgages and construction-related loans were likely to increase, albeit from low levels. “...Malaysian banks have robust capital buffers and healthy pre-provision profitability. That said, we consider mortgages with high loan-to-value ratios and loans to overleveraged households and developers to be at risk of payment slippage,” Moody’s stated.
Regulatory measures aimed at cooling the market will play a part in driving down demand. In 2013, Bank Negara Malaysia capped mortgage terms at a maximum of 35 years and personal loans at 10 years, while also limiting pre-approved housing loans by developers.
GST set to bite
The introduction of the new GST, which will see a 6% levy imposed on most transactions, is also contributing to a drop in activity. While house sales themselves are exempt from the GST, factors contributing to housing prices, such as the labour and materials used in construction, are not. Increased costs will inevitably affect overall prices. Analysts expect the GST to push up house prices by around 4%, while Redha in March puts the increase at more than 6%.
Siva Shanker, the president of the Malaysian Institute of Estate Agents, believes the residential segment of the property market is set for a slowdown this year, with activity rising in 2016. “2015 will be a bit flat, but better for the secondary market. In 2016, the market will start climbing a bit,” he told local media in April. “In 2017, we’ll see serious interest and 2018 can be the next property high.”
Some analysts have suggested that the introduction of the GST could boost interest in older properties since these are less likely to be affected by higher costs, while for new builds there is likely to be a greater emphasis on affordability.
Tong Seech Wi, CEO of integrated property developer MCT, said his firm was looking to maintain revenue flow and earnings by sharpening its focus on more moderately priced units, with more than half of its output to be priced at RM500,000 ($137,000) or below. “This is what this market needs,” Tong said “We believe with this right product and pricing, we should be able to ride through this difficult period.”