Of Property Overhang and Mounting Household Debt.

Dr Dzulkefly Ahmad, Member, PAS Central Working Committee.

Property Overhang as reported by Napic (National Property Informational Centre) for the third quarter of last year was supposedly a cause for alarm. Then there was an overhang of 20,286 residential, 5,450 shop and 619 industrial units worth a whopping RM5.3 billion.

Of the 6,401 new residential units launched during the third quarter, which was a far cry from the 14,588 units launched in the previous corresponding quarter, only 20.2% found buyers.

If the RM5.3 billion overhang failed to deter the enthusiasm of the NEM planners, let’s consider what is in the pipeline.

The Finance Ministry also reported another 44,954 residential, 4,605 shop and 794 industrial units were under construction as of the third quarter. Projects approved but yet to be implemented comprised another 14,993 residential, 1,011 shop and 872 industrial units.

The massive overhang constitutes not just a financial burden to the developers and their financiers, most of whom are financial institutions, but is also a waste of resources, much worse, contrary to the 40% carbon emission reduction intensity of GDP as vouched by the Prime Minister in Copenhagen, December 2009.

More recently, Napic’s Property Overhang reports show that unsold properties in Malaysia rose to 22.6 per cent of new launches in the second quarter of this year, from 19.5 per cent in the fourth quarter of last year. For Kuala Lumpur, unsold properties rose to 16.1 per cent from 15.8 per cent, while for Selangor it rose to 14.6 per cent from 12.4 per cent.

Quite ironically while a glut is emerging, prices of residential property have surged by as much as 35 per cent in the past year, far above income growth and giving rise to concerns that the market is becoming unsustainable.

Checks on developments completed this year also show that vacancy rates remain at 50 per cent or higher.

While the notion of property is usually resisted by developers and the KPKT, valuers and observers may have to nod when it come to property ‘hotspots’ in Penang and Kuala Lumpur.

While prices keep going up, the economic returns decline. This, in return, contributes towards distorting the economy and plunging the country ever deeper into a frightening ‘economic bubble’.

On the back of the emerging property bubble, the revelation of a ballooning household debt, comprising mainly house mortgages, cars loans and personal financing such as credit cards, debit cards which stood at an all time high of RM560 billion as at Aug 31, 2010 from Bank Negara Malaysia data is surely a cause for alarm.

The rapid growth in household debts now poses a threat to the economy and exacerbates the vulnerability and instability to the financial sector.

It is worth noting that our household debt to GDP ratio shot up to 76% between 2004 and 2009 and is the highest in Asia, except for Japan. But as a reminder, Japan’s per capital income of US$32,700 or about RM8000 per month in 2009, while Malaysia’s average income per capital is less than RM2000 per month.

According to a note by CIMB Research, the ratio of household debt to personal disposal income hit 140.4 % in 2009- higher than Singapore 105.3% and the US 123.3%. This means Malaysians owe double the amount they earn.

Credit Counselling and Debt Management Agency (AKPK) reported a total of 50,361 cases enrolled in debt management program with 10.6% of them who could not pay their credit card debt while 74.3% had repayment problem with housing loans, car loans and credit cards outstanding.

AKPK’s CEO Mohamed Akwal Sultan said some 44% of the individuals who join the programme belong to the 30 to 40 age group. Some individuals start to have repayment issues when they are even younger because many of them do not have salaries that commensurate with their lifestyle. High car prices, due to protectionist policy of the government doesn’t help while most are already in debt as soon as after graduation because of loan repayment for their studies ie the PTPTN. The problems worsen when they hit their 30s and beyond.

Since Malaysians tend to have short memories and have a penchant for the denial syndrome, it’s pertinent to remind our political leaders and planners of the costly deflation of the property bubble in the aftermath of the 1997/98 regional financial crisis.

When the property bubble burst, the banking system was left with RM51.8 billion worth of non-performing loans (NPLs), forcing the government of Tun Dr Mahathir Mohamad to form Danaharta Bhd to assume the NPLs and Danamodal to help recapitalise the banks.

Danaharta subsequently assumed NPLs worth over RM50 billion and overnight, became the largest real estate owner in the country with assets valued at RM3.63 billion while Danamodal injected RM11.7 billion to revitalize and recapitalise the banks.

Going by the orgy of real estate developments in recent years, it is clear that both the regulators and the developers have forgotten the 1997/98 lessons or have not learnt much. Notably the government is discouraged to put a higher real property gains tax (RPGT) and restrictive loan-to-value (LTV) caps as it will be a deterrent to foreign direct investments and high net worth individuals. Besides, a higher LTV for second and third home buyers and in specific hotspots areas, of say 70:30, may not be complied with after all, by the financial institutions.

On the back of a burdening household debt, though arguably not-so-high NPL as yet (3.7% of GDP), the oblivious attitude of the government, the prolonged low-interest rate regime, the ‘greedy’ developers and the less-than-prudent practices of the financial institutions, are doubtless, ‘fodders’ that fuelled the formation of a ‘property bubble”.

 Quite evidently, the property and construction sectors are again leveraged to the maximum as the top contributors to economic growth. It is all so easy for the government to take a short-term approach to realize targeted growth numbers, visibly at the risk of jeopardizing and shortchanging the long-term well-being of the economy.

Despite all the avowed big sounding slogans on performance and competitiveness, very unfortunately, nothing has really changed in Malaysia Bolehland.


10 thoughts on “Of Property Overhang and Mounting Household Debt.

  1. a) Our imported cars are taxed 300%, plus AP fees. the buyer pays 20% and the remainder monthly installment for up to 9 years. (The 10% deposit is actually 33% of the actual car price.)

    b) Imported car buyers (non-asean) is actually forced to financed his import car tax, and pay this tax monthly (for up to 9 years) with interest.

    c) Due to this, money meant for small businesses is taken by the need to finance the import car taxes, hence small businesses suffer. Small businesses are the backbone of the nation.

    d) cars also depreciate over time. So those who buys imported cars suffer inumerable financial losses.

    e) those who use financial institution to buy houses do not suffer as much as properties does not depreciate or sometime appreciate in value.

    f) In singapore, you can get along using public tranSportation. the govenrment in singapore has committed another S$40 biilion for their public transportTION IN THE NEXT FEW YEARS.

    h) malaysia did not honour our AFTA agreement concerning import of motor vehicles from other asean states. Due to this, other nations retaliated and make it tough for malaysian made cars to be imported into their country. there was suppose to be no protective tarrifs and barriers, but we impose 50% tarrif on cars made in other asean made nations. Due to this, cars that cost RM40+k in asean, cost almost 70+k here.

    i) high taxes erode competitiveness. either remover the import tax, or ban the sale of imported cars so that we can make better use money lying in the financial institution to the advantage of our economy, such as financing small and medium size businesses.

    j) developers are all developing expensive properties that gives them huge profits. the house for the common man is neglected. The recent sunrise-UEMland and IJM-MRCB merger reinforce this fact.

  2. Looks like Malaysia is in a big hurry to build houses,shoplots,condos etc……whats the point when most of our drains have not been cleaned for more than 30 years, not to mention those dirty toilets which are all basic needs of people.

  3. The only reason this keeps happening is because our irresponsible bankers get bailed out all the time using TAX PAYERS money…

    They are just like any other buisness….they lend buta buta…and cannot recover…tutup kedai…

    The government should let this guys sink….and Malaysians must be more discerning where they want to save their monies…Stop supporting banks that are n cahoots with developers

  4. Panduan syarak diabaikan… syaitan yang jadi pemandu… panduan syaitan BOROS… CREATE OPPORTUNITIES … merely for showtime pride and glamour… kesian rakyat jelata yang tertipu oleh hebat (kunonnya) pemimpin masa kini… MEMANG TIDAK AMANAH !

    ….. BERSEDERHANA DIANJURKAN SYARAK, PASTI BAHAGIA DAN BAROKAH.

  5. Tip for those ready to pay high prices and fall victims to these sharks: Money and people are pouring out of the country. What makes you think you will be able to even maintain the market value of your property?

  6. as long as interest rates remain low…. the populace will keep on borowing and banks will oblige, they still make a killing on the borrowing and lending gap……there is a complicity between banks, evaluators and developers that is setting up the general population…Greed festers and feeds on itself, a bubble waiting.

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