A third eye on HCGS

The proposed Housing Completion Guarantee Scheme (HCGS) by Rehda Institute has sparked a significant debate regarding its potential impact on Malaysia’s housing sector.

While proponents may view it as a solution to protect homebuyers from abandoned projects, a deeper analysis reveals a number of critical concerns, primarily that the scheme could inadvertently reward irresponsible development practices and place an undue burden on taxpayers.

The analysis also shows that the core arguments against HCGS centre on fundamental issues of enforcement, financial accountability and market principles.

Enforcement problem

The issue of abandoned housing projects is often misdiagnosed. The root cause is not a lack of protective legislation but rather the failure to rigorously enforce existing laws.

Malaysia’s Housing Development (Control & Licensing) Act 1966 already grants the Housing and Local Government Ministry (KPKT) and its minister wide-ranging powers to intervene in and salvage sick projects.

These powers include the authority to investigate developers who are operating in a “manner detrimental to his purchaser” or who have “insufficient assets to meet his liability”.

However, despite these provisions, the number of abandoned projects continues to rise, harming innocent buyers and the wider community.

The proposed HCGS would do little to address this underlying issue of lax enforcement.

Instead of strengthening the existing regulatory framework, it seeks to create a new, government-funded safety net that could be viewed as a bail-out mechanism for developers.

Peril of privatised profits

The strongest criticism of the HCGS is its misguided financial model: it privatises profits while nationalising losses.

If implemented, the scheme would essentially guarantee developers an exit strategy, allowing them to launch projects recklessly without bearing the full weight of the risk.

A developer could potentially initiate a large-scale project, knowing that if financial troubles arise, the government – and by extension, the taxpayer – will have to step in to mop up the consequences.

This creates a moral hazard, encouraging developers with poor track records or weak financials to gamble with homebuyers’ money collected through progress billings.

This approach is fundamentally at odds with the principles of a free market, where risk is inherently tied to reward.

By shifting the burden of risk from the developer to the government, the HCGS provides an unfair advantage over other industries that must bear their own risk. It creates a perverse incentive for developers to be less careful with their planning and capital, potentially leading to an exponential increase in abandoned projects.

Burden on buyer, taxpayer

The HCGS proposal raises serious questions about who will ultimately bear the cost.

If the developer pays a hefty insurance premium, that cost will inevitably be passed on to the consumer in the form of higher property prices.

If homebuyers are made to pay the premium directly, they would be funding a scheme that primarily benefits developers and banks by mitigating their risk, all while their own affordability is already severely constrained.

If the scheme is government- funded, it means that taxpayers – including those who cannot afford to buy a house – will be subsidising the risks of private real estate ventures.

This sets a dangerous precedent, as it could open a floodgate of similar demands from other sectors of the economy seeking government-backed insurance subsidies. This is particularly concerning given the current economic climate, with the government already cutting subsidies and introducing new taxes.

A better path forward

An alternative and more robust solution is the built-then-sell (BTS) 10:90 concept, which has been championed by the National House Buyers Association (HBA). Under this model, developers are required to use their own capital or obtain project financing from banks to complete a housing project before receiving the full payment from homebuyers.

This approach ensures developers are financially committed from the outset.

If a project were to be abandoned, the developer would bear the entire loss and their bridging financier could take over the project without involving public funds or the complex, multi-party negotiations that plague existing abandoned projects.

The BTS 10:90 model incentivises due diligence and sound financial management, as the developer’s profits are contingent on successful completion.

This shifts the risk back to the risk-taker, which is a core principle of a healthy market.

The HCGS is an ill-conceived proposal that fails to address the fundamental issues plaguing Malaysia’s housing market.

Rather than providing a genuine solution, it acts as a get-out-of-jail-free card for wayward developers while exposing taxpayers and homebuyers to greater financial risk.

The proposal is a re-emergence of an idea that was previously rejected for its impracticality.

KPKT must engage with all stakeholders and learn from past mistakes, such as the 2001 massive bailout of the Korea Housing Guarantee Corp, which was a state-invested firm.

While some models may work in other countries, they must be thoroughly vetted for their applicability to Malaysia’s unique market conditions.

The focus should remain on strengthening regulatory enforcement and promoting accountability through a sound, market-driven model like the BTS 10:90 concept. The ultimate goal must be to protect homebuyers and ensure a sustainable housing industry, not to underwrite the risks of private enterprises.