Loan factor: Banks approve loan applications based on S&P headline prices and not on actual house prices.
BANKS with large exposure to housing loans may have a problem as a result of the way properties were priced, marketed and sold the last several years, industry sources say.
This is particularly so if borrowers default on their housing loans.
“The number of distressed cases are on the rise, but this is not being reported,” a source says. Or it could be under-reported.
An indication of rising distressed cases is the rising foreclosures.
Foreclosure is a process, whereas the auction is the final point.
People bought properties in droves over the past 10 years, paying minimal downpayment and some made multiple purchases.
Banks disbursed loans based on sales and purchase agreement (SPA) price, instead of the actual house price, less rebates and freebies.
Essentially, the conclusion after speaking with developers, property consultants, a bank source and two auctioneers is that the “chickens have come home to roost”.
Sources concur that today’s weak property market must be viewed from 10 years ago when prices began to rise starting 2009/2010.
This was the period of easy credit, creative marketing strategies, multiple purchases, and young people entering the market in droves.
The purchase of multiple units, prevalent in the years starting 2009/10 was due to developers giving huge rebates, the use of mortgage brokers, investor clubs and the speculative element in society, a source says.
The market was “hot” and banks outsourced their services using mortgage brokers, the source says.
These mortgage brokers may apply up to six banks for a buyer. When three approve a loan, instead of buying one house which cost RM800,000, the buyer may end up buying three.
The “motivation”, he says, is the cash rebate which sometimes run up to 30% of the house price.
On the conservative side, the buyer may be offered RM100,000 rebate for a RM800,000 house. Three houses mean RM300,000.
Assuming a 30% rebate, that is RM240,000 per house. So the borrower takes a 90% loan, or RM720,000. The buyer gets a “cash back” of RM160,000.
Banking sector’s “responsible lending measures” took effect on Jan 1, 2012. Interest bearing schemes were banned Jan 1, 2014.
“Buyers rationalise he can use the cash back to pay the car loan or use it for one of the three houses on completion and flip the other two.
“They did not expect the market to turn,” the source says.
Multiple applications
Banks were unaware of multiple loan applications.
“The whole process is to cheat the banks,” the source says.
“This led to banks asking for termination letters from the other banks, when they got wind of it,” the source says.
Buyers face financial difficulties when they have to pay full installment, the source says.
As a result of the excesses of the past years, today, some banks want the unit to be valued independently when the developer sells to buyers.
They want to know “the real price” of the house to base their loan approval, and not the SPA price, the source says.
“Some banks are more careful and stringent now. They are beginning to realise the negative repercussion of rebates,” the source says.
“If the rebate is 35% to 40%, giving a 70% financing is still high,” the source says.
The practice of giving rebates has become a poser to developers. They had two options, state the overall headline price of RM800,000 (option one) or state the real price of RM560,000 in the SPA, after a 30% discount (option two)
Developers prefer option two, because either way, they get RM560,000.
The issue is, they, the developers, had earlier priced the units using the overall headline price. Previous buyers would be upset. So the developer throws in more freebies and the cycle repeats itself, the source says, with the actual price becoming less transparent.
The issue is complicated further with completed unsold units. As at Dec 31, 2018, Malaysia has unsold completed residential units including serviced apartment and small offices home offices totalling 45,027 units, valued at RM29.69bil.
Most developers have excess stock.
Negative consequence
There are multiple consequences of using overall headline price in the SPA inclusive of rebates and other freebies, instead of the net house price.
It affects the banking sector when the amount disbursed is more than the net house price. Banks and auctioneers are seeing the impact of this today.
Secondly, it throws the overall market out of whack, the source says.
“When developers initiated such rebates, they did not consider the consequence in a down market. We are in that market today.
“They were happy to make high profits during the good years and they assume prices would always be on the uptrend.
Secondly, the property yield becomes progressively lower, which is what we are seeing today, the source says.
The yield for a high-rise residential unit was 8%-10% more than 10 years ago; for landed, about 4% because capital appreciation is higher for landed units.
This has gone down to 2%- 3%, maybe even less for landed.
The property consultant is also “unaware” of the real price, the source says. He sees the RM800,000 on the SPA and does his calculations.
So if the yield is only 2.2%, the conclusion is that it is not worth investing, the source says.
Back to basics
“How much is your rental yield? Property pricing is going back to basics today. This is a more practical and realistic measure of house price. Whether it is for own use or for investment, how much rent can you derive from it. A yield of 4% is acceptable.
“So you work backwards to derive the price of the house,” the source says.
The source highlighted a civil suit United Overseas Bank Ltd v Lippo Marina Collection Pte Ltd and others. The bank alleged that the developer and the other defendants had failed to inform it of the “very substantial” discounts given of between 22% and 34% for Sentosa Cove units. It alleged the agents used “deceit and conspiracy over the inflated loans” press reports in 2017 said.
As a result, 38 buyers were each granted loans of between S$4.2mil and S$5mil, totalling about S$180mil.
The source says there are mutterings among some in the real estate profession seeking for new projects to be valued in order to safeguard the lending institutions.
Unlike the secondary market where a buyer needs to value a property if he were to seek bank financing, buyers buying directly from developers need not do so, even when he is seeking a bank loan.
“Developers are unhappy about this (request seeking new projects be independently valued) as it would mean a cost for them.
“Their rationale: it is already difficult for buyers to get loans. Sales will be worse if banks ask for valuation.
“But banks are already calling up valuers to ‘discover’ the real market value of the house,” the source says.
