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Monday September 24, 2012

Keeping our property market robust

SOME analysts have already downgraded the property sector amid speculations that Budget 2013 will implement tough measures on the industry.

Soaring property prices are on most people’s minds but any steps taken to counter this may not be positively viewed by industry players. Yet, public outcry has been loud and clear – affordable living tops the rakyat’s budget wish list .

As a listening Government, I expect that they will include strategies to address this issue in Budget 2013. At the same time, the Government will need to make sure that the Malaysian property market remains robust and attractive, to both local and foreign investors.

In managing this, the Government should take a two-pronged approach – giving incentives and support to increase affordability, and curbing spiralling property prices.

Increasing affordability

Expectations are high as to how the Government will deal with this issue. It launched the PR1MA project to provide affordable housing to first-time homebuyers, but critics say that the loan approval process has been slow and there has been a large number of rejections due to stringent lending requirements. The eligibility criteria should be reviewed – with lower interest rates and the loan repayment period extended.

It is still early in the game to evaluate the success of PR1MA as its first property launch happened only in November last year. But I firmly believe that it is a step in the right direction and the Government should continue pressing on – allocating more land and accelerating project launches, particularly in the Klang Valley, Penang island and Johor Baru, which are the areas worst hit by high property prices. The Government also recently announced its plan to build 50,000 units in Kuala Lumpur alone in 2013, which is another piece of good news.

But the current requirement for private developers to build low-cost homes may not yield its full benefits as this is obviously not their focus. Instead, each state could set up a trust fund or foundation, which developers can choose to contribute to. The fund would then coordinate the construction, allocation and maintenance of affordable housing.

For other first-time homebuyers, the Government could introduce a tax relief on interest expenses incurred to buy residential properties. Such a move wouldn’t be new as it was introduced during the 2009 economic stimulus package to address the dampening property market then.

Also, while full stamp duty exemption has been given to property bought under the PR1MA scheme, property in the medium price range should not be forgotten. The current 50% stamp duty exemption for properties valued RM350,000 and below will expire this year.

I hope the Government will extend the exemption period, and increase it to a 100% exemption moving forward. In addition, looking at the prevailing market prices, the threshold should be increased to at least RM500,000.

Managing property prices

There is a strong sentiment that property prices are soaring beyond what’s affordable. But if we compare ourselves to neighbouring countries, our residential property prices aren’t all that bad. Except, perhaps, in some urban areas like the Klang Valley and Penang island.

To curb property prices, Bank Negara has tightened measures – a 30% loan-to-value ratio for third mortgages onwards is required, and loan affordability is now based on net income instead of gross income. These measures have yielded some positive results, but may not be enough.

Stamp duty on property acquisition can be used as a tool. Singapore, for example, recently introduced additional buyer stamp duty (ABSD) of up to 10% for foreign buyers and 3% for subsequent property purchases by Singapore citizens and permanent residents. The ABSD is imposed on top of the normal stamp duty rates. Our Government could consider adopting this.

Real property gains tax (RPGT) is also a good way of managing property prices. There’s been talk that the Government may reintroduce RPGT in its original form i.e. with a tax band of 30% to 5% for corporates, and 30% to 0% for Malaysian residents. (see figure 1) The current RPGT regime was brought back in 2010, following the revocation of full RPGT exemption since April 1, 2007.

The existing RPGT rate of 10% is rather mild in addressing the speculative nature of the property industry so a rate of 30% would have greater impact. The existing three-tier low RPGT rates are not effective as properties generally take two to three years to complete development. By that time, the rate would have dropped to 5%.

While these are all good measures to counter property prices, we need to be careful that any move to increase affordability could also dampen market sentiment. This could have adverse effects on the property market’s growth.

In fact, the property market has already started to show signs of cooling with home loan approval rate dipping in the first half of 2012. Despite the recent Asia Property Market Sentiment Report 2012, which revealed that Malaysians continue to be upbeat about the property market, we need to be mindful of the current economic calamity facing the world which may soon hit our shores. The softening market demand, both locally and abroad, coupled with counter measures could severely impact the property industry.

With elections looming round the corner, any aggressive counter measures are unlikely. Nonetheless, the Government should seriously consider RPGT as a long term strategy for managing the speculative nature of the industry.

It’s fairly certain that the property sector will be one of the priority areas for Budget 2013. The rakyat will invariably expect some goodies to be handed to them. And property players will have to keep their fingers crossed that any measures taken should not significantly dampen market sentiments and property demand.

l The writer is senior executive director of taxation services at PwC.


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