Malaysia’s central bank has stepped in to lower the temperature of the real estate sector, restricting access to credit for those buying third or subsequent residential properties. However, authorities are playing down speculation over a bubble, describing the intervention as a measure to keep housing affordable.
On November 3, Bank Negara Malaysia issued a statement announcing a new loan-to-value ratio (LVR) ceiling for persons seeking credit to buy a third home, with the maximum limit being set at a still substantial 70%.
In a statement released to coincide with the announcement of the new loan restrictions, Bank Negara governor Zeti Akhtar Aziz said the move was a preventive measure rather than a response to an existing overheated market.
“While Malaysia is not experiencing a general property bubble, targeted pre-emptive measures are appropriate to moderate the increases in property prices that are evident in selected locations that are speculative in nature,” she said.
Malaysia’s property market has been booming of late, with the residential segment particularly active. August saw a 32% increase in applications for home loans compared to the same month in 2009, while analysts predict that residential sales could be up by some 26% for the whole year, with a combined value of $17bn or more.
With the central bank’s interest rate still running at just 2.75%, and banks prepared to lend up to 90% of the value of a property to potential buyers, there has been a high level of liquidity in the market, matching demand but also inflating prices and potentially a bubble.
The move to tighten credit for third properties came as no surprise, as it had been flagged by Prime Minister Najib Razak in September, amid media reports that Bank Negara had been holding talks with lenders about ways to curb real estate speculation.
On September 21, Najib told reporters that the government and the central bank were considering placing a limit on financing for third purchases, though he said there was no intention to lower the lending ceiling for what the prime minister called “bona fide buyers”.
Most analysts and market experts backed the move, with Datuk Michael Yam, the president of the Real Estate and Housing Developers Association, saying the central bank’s action would result in a healthier and more orderly residential market but should not hit first-home buyers.
“As financing for the first and second housing properties will not be affected by the ruling, the move is not expected to dampen the performance and growth of the housing property sector” he told the Malaysian Star on November 4. “Meanwhile, the LVR cap on those buying their third and subsequent house should stem speculative buying and ensure a more sustainable housing market.”
According to Dr Goh Ban Lee, a senior research fellow at the Socio-Economic and Environmental Research Institute, the move to cool the property market by Bank Negara was a positive one, though not guaranteed to halt speculation and slow price increases.
“Though mild, it does send the message that the central bank is concerned and taking a concrete step,” he said on November 9. “There is no foolproof mechanism to ensure that the affordability gap will close or become smaller. Much needs to be done. The 70% loan ruling is at least an attempt to slow down the speculative property market.”
That attempt may be the limit of what the central bank can do just at this moment. There is a view that Bank Negara had its hands tied over steps it can take to cool the surging sales in residential property. With the government having worked hard to promote economic activity and fire up consumer spending, a steep interest rate hike would have been counterproductive and would have also had an across the board impact, rather than just in the real estate sector.
With household debt currently running at around 77% of GDP, any increase in interest rates by the reserve bank would have put pressure on the economy and had the potential to cool spending.
Though the new LVR regulations came into effect immediately, it will still take some time before the full impact of Bank Negara’s measures can be assessed. The reserve and the government will be hoping the limits will be enough to reduce the flow of credit without discouraging property development but that they will be sufficient in themselves to cool demand by a few degrees.