On Friday, Finance Minister Lim Guan Eng lamented the difficulty in securing housing loans faced by prospective home owners and called out lending institutions to be more lenient in providing financing. While he received a lot of criticism for his speech, I am personally in agreement with him. Indeed, banks should not simply be rejecting home financing applications. However, certain conditions such as the following must also be put in place.
First, banks should not reject home financing application from first-time home buyers. However, applications from those who are seeking a second, third, fourth, etc, house should be scrutinised in greater detail to ensure that they have capabilities to pay. Since the finance minister himself insisted that banks should approve this financing, perhaps the Finance Ministry (MOF) can act as a guarantor for the home buyers.
Financial guarantee
Alternatively, financial guarantees can also perhaps be provided by Cagamas. If MOF and financial institutions can contribute even a portion of the financial guarantee, the lending financial institutions will not be exposed to an intolerably high risk of default. At the same time, first-time house buyers would appreciate assistance by the government. House price capped at RM200,000 or RM250,000 can be enforced for this scheme to mitigate the effect in case of default.
Excessive property price as root cause
Second, there should also be attempts to counter the root cause of the issue – excessive property prices. Additional efforts need to be made to ensure that house prices are reasonable in order to reduce the risk borne by the government through MOF and/or Cagamas.
Real Estate and Housing Developers’ Association (Rehda) president Soam Heng Choon recently highlighted the high cost of development charges, premiums paid on lands, and compliance costs enforced upon the developers which eventually get passed on to the buyers. As such, for this special affordable housing scheme, the government should also make efforts to waive or reduce charges typically borne by housing developers.
Similarly, utilities providers such as Tenaga Nasional Bhd and Indah Water Konsortium should only be allowed to charge the costs they incur for extending infrastructure into the new development area, and not to make profit from the development initiative for this scheme as argued by Rehda’s president. Since all other parties – the government and utilities providers – will no longer make profit from this scheme, developers should also play their role. The developers must agree to only make a reasonable profit (approximately 15% to 20%, including profit from land sale) from this initiative. With these conditions in place, house prices will significantly reduced.
Transparency by everyone
For this special affordable housing scheme to succeed, every party must practise transparency, showing all their costs and profits. Housing and Local Government Ministry national housing department director-general Jayaselan Navaratnam pointed out during a discussion session at the launch of the Khazanah Research Institute’s report Rethinking Housing: Between State, Market and Society that the utilities providers had already taken the initiative to demonstrate their costs. The onus is now on housing developers to up their game.
Financing is only one of the solutions
The finance minister’s push for banks to be more active in providing financing for house buyers is a welcome one, but it cannot operate in isolation. The prices of the houses themselves need to be reduced, and banks are likely to be more willing to provide financing as more people would be eligible for financing with lower house price.
MOHD ARIFF MOHD DAUD
Senior Research Analyst, IRDP
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