Banks to take heed of ‘superficial discounts’
By Chang Kim Loong |   |  Featured, Opinion, Property

This is in response to a report on financing issues in The Star titled “Banks aware of ‘discounts’ given by developers”.

The National House Buyers Association (HBA) is glad to hear the report that “two commercial banks said that they are aware of discounting practices by Developers and have taken the necessary mitigating measures to ensure that the end-financing is reflective of the value of the property purchased”.

Its ‘open secret’ in marketing ploy

For many years, HBA has spoken against the “open secret” that housing developers artificially inflate property prices and then offer a rebate to offset against the 10% down payment, thus indirectly giving their buyers up to 100% end-financing.

As far back as in 2013, Bank Negara Malaysia (BNM) had officially instructed all banks in Malaysia to offer maximum 90% end-financing based on the net selling price of the property after deducting all discounts and rebates offered by housing developers. However, housing developers continue to openly advertise the existence of such rebates.  It was only lately that the Real Estate and Housing Developers' Association Malaysia (Rehda) was complaining that house buyers are not given full financing, which means that most banks just close both eyes when it comes to the rebate issue.

Effects of ‘marked-up’ price

Although the act of increasing property prices and then offering rebates, say up to 10%, appears to help the rakyat to buy their dream homes, such acts do more harm than good in the long run.

Using an example of a property that is only valued at RM450,000, if the housing developer wants to offer a 10% rebate, the selling price will then be inflated to RM500,000 and the developer offers a 10% rebate equal to RM50,000. Hence, the house buyer would get a full loan of RM450,000. Some of the negative consequences of this rebate nonsense are:

a) Higher costs to the house buyer such as stamp duty for the transfer of properties and loan agreements are based on a regulated percentage of the value of the property or loan. The higher the property price or loan, the higher the stamp duty.

The artificial increase of RM50,000 will result in a higher stamp duty on the transfer of property of RM1,000 and loan agreement of RM250.

b) Higher interest amount as the house buyer is taking a higher loan. In our current example, the total loan repayment for a loan of RM450,000 verses a loan of RM405,000 (RM450,000 x 90%) for a typical 30-year loan is higher by RM83,000.

c) Increases prices of existing completed properties and future launches. Prices of completed properties, or also known as secondary properties, are inter-linked with prices of new launches, also known as primary properties. When even the prices of primary properties increase, the owners of the secondary properties will also increase their selling price. This in turn will also increase the prices of future launches and the vicious cycle continues. This will ultimately result in property prices increasing out of the reach of the average rakyat.

d) Encourages speculation as the house buyer only needs to pay the ancillary cost to purchase the property and service some interest during construction.  Upon completion, the house buyer will then try to flip the property for a quick gain. This method has encouraged a lot of “flippers” in the market, ie investors club and those in for a quick profit.

The “prices” declared to the government, especially Jabatan Pernilaian dan Perkhidmatan Harta (JPPH), are the “transacted prices” stated in the sale and purchase agreement and not their true prices. Hence, when valuations are made, the false information exacerbates price discovery and can lead to valuations that are ever spiraling. These actions make true price discovery difficult. Sometimes, we wonder how those developers reconcile in their books – the sale and purchase price verses the “true price”, since they have declared to the banks the sale and purchase agreement prices are the true prices. Similarly, we wonder – how will the auditors and Lembaga Hasil Dalam Negeri (LHDN) look at them?

HBA acknowledges that one of the most challenging issues in buying a property is to come up with the 10% down payment. To this, HBA has called for first-time house buyers to be allowed to be given 100% end-financing to buy affordable properties costing RM300,000 and below. In fact, there are various schemes by the government to assist first-time house buyers especially in the B40 and M40 groups to get 100% end-financing, subject to fulfilment of terms and conditions.

Buying a property is the biggest purchase that the average rakyat will make in their lifetime and hence, it is important that aspiring house buyers must save enough money to pay the 10% down payment and be able to afford the monthly instalments while maintaining an acceptable standard of living. Aspiring house buyers must also factor in potential changes in lifestyle, such as having additional children or ageing parents, before committing to the house purchase.

HBA sincerely hopes that commercial banks will really take the necessary measures to ensure that the end-financing amount is reflective of the true value of the property and adopt responsible lending process. HBA also calls for BNM to ensure that all banks in Malaysia adhere to the BNM guidelines that end-financing is based on net of discounts and rebates as some banks continue to close both eyes when it comes to this rebate issue.

MCO sales bargain?

The Covid-19 pandemic is expected to take a heavy toll on the property sector, and property developers are expected to give massive rebates to entice house buyers, even to the extent that a certain developer was reported to have guaranteed “one Proton for every unit one property bought”. Hence, more stringent action is required for this critical stage, else the banking industry will be saddled with property loans that are not reflective of their true value. - June 6, 2020

Datuk Chang Kim Loong is secretary-general of the National House Buyers Association

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