Open letter to the housing minister – easy credit will only inflate property prices

I read your tweet thanking Bank Negara Malaysia (BNM) for fulfilling your ministry’s request to increase the threshold for the Fund for Affordable Home created by the central bank.

On August 21, the UK Collaborative Centre for Housing Evidence (Cache) released a report entitled Tackling the housing crisis: Is supply the answer?

Besides debating on the issue of housing supply in the UK, the report provides reasons why house prices are so high in the UK. Unsurprisingly, this is due to the collapse in mortgage rate that has allowed people to borrow even more money. This eventually chased house prices upwards.

They are not alone in saying this.

McQuinn & O’Reilly (2008) from Central Bank and Financial Services Authority of Ireland in their paper postulated that house prices are related to the level of borrowing that individuals can obtain from financial institutions. The level of borrowing is dependent on their real income and interest rate. They show a positive relationship between the amount of financing that individuals can obtain and house prices in the long-run.

Quan Gan & Robert J. Hill (2009) from University of Sydney and University of New South Wales discovered that availability of credit caused appreciation in house prices between 1996 to 2006 in Sydney, rather than improvement in affordability.

In Finland, Elias Oikarinen (2009) from Turku School of Economics in his paper discovered that the availability of bank credit via lower lending rates led to increasing demand for housing and house price appreciation in Helsinki.

This is a similar case in Hong Kong, South Korea, Singapore, and Thailand. Charles Collyns & Abdelhak Senhardji from IMF studied the effect of bank lending on property prices in these countries and discovered a positive correlation between credit growth and real GDP per capita to property prices. Furthermore, they also discovered a strong effect of credit growth on property prices during both the pre-Asian crisis period and escalating property price periods in the 1990s.

Research done by Stefan Gerlach & Wensheng Peng (2005) from the Hong Kong Monetary Authority showed a positive relationship between house prices and bank lending in Hong Kong.

This was also supported by the research by Haibin Zhu (2006) from Bank for International Settlements, which measured the structure of housing finance markets and house prices in six Asian countries, which include China, Hong Kong, Indonesia, South Korea, Singapore and Thailand. The paper postulated that bank credit was a significant determinant in causing house price appreciation.

In Malaysia, Mansor Ibrahim from INCEIF & Siong Hook Law from UPM (2014) discovered that bank credit had a positive relationship with house prices in the long-run. The paper also found that the low interest rate environment may have led to asset price bubbles, and the central bank must minimise the impact of easy credit on house price appreciation.

I would suggest you read the book entitled House of Debt: How They (and You) cause the Great Recession, and How We Can Prevent It from Happening Again by Professor Atif Mian of Princeton University and Professor Amir Sufi of Chicago University. In this book, they proposed another reason on why the Global Financial Crisis of 2008 occurred.

In general, they argue that the availability of easy credit caused people to be highly indebted, and do not have enough disposable income to spend. This subsequently caused consumption to drop and affected manufacturing and services. With economic activity slowing down due to lesser consumer spending, industries are forced to lay off people. Subsequently, people who are highly indebted was not able to repay their debt and caused the banking and financial system to collapse, as we are well aware of.

The point is, despite all the evidence, why is the government doing the contrary? It’s as if the government is intentionally trying to replicate the same events which happened more than 10 years ago.

With maximum threshold of housing price at RM300,000 and household income at RM4,360, the houses are considered as severely unaffordable according to the median multiple method used by the World Bank. Households will have less disposable income to spend on other necessities.

Providing easy credit will not solve the housing affordability issue but worsens it in the long run. As highlighted by Suraya Ismail of Khazanah Research Institute, reducing house prices is the answer.

This should be coupled with increasing the supply of houses (at lower cost), and providing some measures to avoid speculation. Of course, the longer-term answer would be to ensure that Malaysians earn higher wages to afford these “affordable houses”

MOHD ARIFF MOHD DAUD

Senior Research Analyst, IRDP

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