PRICES HAVE TO COME DOWN IN ORDER TO AVOID SOURING INTEREST IN THE PROPERTY MARKET
While Bank Negara Malaysia’s move to raise interest rates is largely seen as unavoidable and necessary by most economists, there is also serious concern about how this may impact the property sector.
Currently, the industry is already facing diminishing buyer interest on the back of a tough financing regime with low loan approval rates. Add to this the rising cost of materials, an oversupply of commercial space and an overhang in the high-end residential segment, and picture looks increasingly bleak.
Now, higher interest rates add another layer of pain for would-be property buyers who are already being alienated by the high costs involved in property acquisition.
The predicament for most developers, however, is that they still have stock to sell and many market watchers agree that prices will have to come down in order to preserve any interest in the market.
On the upside, analysts believe higher interest rates will further deter speculative activity, which has been vilified as the main cause of rising property prices in the first place.
In the heyday of the now-banned Developer Interest Bearing Scheme (DIBS), many speculators would have overreached and taken massive loans to finance bloc purchases. Now, faced with increased loan costs and unsold property, they may choose to dispose of these at a lower price to mitigate losses.
It is important to note that DIBS also paved the way to property ownership for low-income earners and first-time house buyers who may have stretched their affordability levels to attain a home. For them, higher interest costs could be the tipping point, and faced with an inability to sustain their loan and the prevailing low buyer appetite, they too may be forced to sell at a loss.
The interest rate hike may also put many developers in a less-than-ideal corner, especially those engaged in the office, retail and high-end residential subsectors where excess supply has made it hard to compete. Here too, innovative marketing schemes and various other “add-ons” may prove insufficient to attract consumers who are not interested in taking on a bank loan.
Ultimately, many will have to readjust their pricing strategy considerably to make their products more attractive and affordable. Faced with the prospect of more room for capital appreciation and the chance to qualify for a loan, buyers could be coerced into rediscovering their property aspirations.
Any movement on price, however, would have to be handled responsibly to avoid the perception of a sudden drop or a fire sale. Initially, developers may approach this strategy by offering appealing discounts rather than more direct price hacks. They too will be wary that causing another buying frenzy might spark another round of speculation. Stronger, but temporary, regulatory controls may also have to be put in place.
BNM raised the overnight policy rate (OPR) by 25 basis points on January 25, which means the current rate is set at 3.25%. There last time BNM raised the OPR was in 2014, when it was also raised by 25 basis points.
In explaining the move, the central bank said it was necessary in order to “normalise the degree of monetary accommodation” because the economy has proven that it is growing steadily.
Economic analysts, both regional and local, have supported the move, calling it “tough” but crucial to ensure that inflation is controlled and consumers are protected.
Inflation rates crept over the 3.7% mark in 2017, and as a result deposit rates were eroding to an average of 3.1% (as at Nov 2017). Additionally, retail rates have been trending negative over the past 12 months.
In the immediate aftermath of the decision by BNM, the ringgit rallied to RM3.92 per USD. Overall, the ringgit has gained on the USD by 2.5% since the start of this year, marking a 16-month high.
A strengthening ringgit would infuse some much-needed positive sentiment in the overall economy, and from the property perspective it could result in a resurgence of foreign investors and stronger capital inflows.
Such an eventuality could return the market to the path it was on before the economy began heading south.