Relaxing lending rules not the solution, says economist

RELAXING lending guidelines in order to help first-time buyers and those in the bottom 40 (B40) group to buy properties is misguided and not dealing with the housing crisis at hand, an economist said.

Institute for Democracy and Economic Affairs (Ideas) senior fellow and economist Carmelo Ferlito says the new government must look at the crisis holistically instead of coming up with piecemeal measures to solve a multi-faceted crisis.

He was responding to Urban Wellbeing Housing and Local Government Minister Zuraida Kamaruddin’s plan to seek Bank Negara’s cooperation to relax lending rules.

“We are looking at just the tip of the iceberg. The crisis is more than just an issue of affordable versus unaffordable units,” he says.

Easy credit creates bubbles. His country, Italy, and other countries in Europe and the US experienced that a decade ago.

Relaxing lending guidelines will expand the bubble beyond its tolerance point.

“The only way to bring down prices is to allow the bubble to burst,” Ferlito says.

The second reason he is against relaxing lending is debt based.

“If this environment of easy loans becomes a reality, the people’s financial standing will be put at risk, at a time when they are already over-exposed,” he says.

For every RM1 a household earns, about 84 sen goes towards debt repayment as at Dec 31, 2017, from 88 sen a year ago.

That is what it means when Malaysia’s household debt is 84.3% of gross domestic product, among the highest in Asia.

The offshoot of relaxing lending rules is creating the perverse mentality in which purchases and investment can take place because of easy money, not because they actually have money to invest.

“This type of mentality is dangerous. This happened to Italy and Greece. Support a saving mentality instead,” he says.

Ferlito says the housing crisis has its beginnings after the last two crises in 1997 and 2008.

Developers ploughed huge resources into the high-end segment of both commercial and residential real estate because they had this profit expectation that this segment will give them higher returns.

As a result of their investments, this segment grew.

But Bank Negara took away the punch bowl of easy credit with prudent lending and instituted measures which weeded out speculation. The party fizzled out.

He says it was hard for developers, buyers and speculators to identify when to dash for the exit because of this favourable credit environment.

“So if developers continue to build but cannot sell resulting in rising unsold units, their profit expectation is frustrated. In technical terms, this is called a crisis,” he says.

Ordinarily, when one segment fails to deliver profit expectations, private developers would invest in the lower end of the market despite lower but steady margins but this segment has been overcrowded by about 20 government housing agencies.

“If the government wants private developers to play a bigger role at the lower end property market, it has to step back. Provide fiscal incentives but do not create housing agencies,” he says.

Entrepreneurial skills curbed

Ferlito says there are two kinds of knowledge, technical and entrepreneurial. The government knows there is a need for affordable housing but it does not have the business savvy.

There is always affordable food because the entrepreneur has positive expectation about it. So she sets up a little stall by the roadside. The government does not need to step in.

The market is able to solve the problem better than the government. This does not mean the market is perfect. But history has shown us that the market solves the problem better than the government.

“Private failure remains in private pockets. Public failure is on everybody’s shoulders,” he says.

Felito’s views is shared by a property consultant who says government-linked corporations (GLCs) and government-linked investment corporations (GLICs) have crowded into the private sector.

Declining to be named, he says for decades GLCs and GLICs have been involved in property development by taking substantial stakes in private developers turning them into GLCs or gone into outright hostile takeovers.

“They crowded into the private sector instead of allowing private entrepreneurial skills to flourish,” he says.

Because of this inter-locking web of ownership, the companies become less agile, he says.

There is also a chorus of property consultants who say private developers should be spared from having to surrender large portion of the land for electrical substations, utilities and infrastructure like roads.

They say such compliance costs have been rising over the years and utility companies like telecommunications and electricity are now listed on the stock market.

These companies are like any other private sector company and they should bear the cost which are currently passed to developers who then pass it to house buyers in the form of higher prices.

Long-term cure needed

The National House Buyers Association (HBA) does not think relaxing lending rules is the right approach.

“Treating the symptoms and not the cause will not provide a long-term cure for this particular ailment,” its honourary secretary-general Chang Kim Loong wrote recently.

Chang says the banking sector is premised on accepting deposits and creating money by lending and profiting from this.

Loosening credit conditions is a recipe for disaster and that was how the sub-prime crisis in US started.

Chang is of the view the supply of affordable housing must rise and suggests bringing back something similar to the 1980s statutory housing loans (SHL).

Under SHL, loans had a fixed rate over the entire loan tenure and were considered by banks to be less lucrative but banks had to meet their quota under conditions imposed by Bank Negara.

“The moral of the story is that the most powerful tool was the mandatory requirement set by the former government. Today, there are no such requirement/quota imposed,” says Chang.

UOBKayHian, in a research report, questions the effectiveness of relaxing lending guidelines.

The report says this could come in the form of relaxing the amount of debt a borrower need to pay by increasing the tenure of the loan, thereby easing his monthly loan obligations.

However, the report says up to three-quarter of borrowers whose applications were approved in 2017 already have debt-to-income level of less than 60%, meaning if a borrower earns RM1,000, less than RM600 goes towards debt repayments.

Only “vulnerable” borrowers need to comply with that 60% cap.

Given that first-time buyers who are younger would fall into the lower-income group, it is “unlikely” banks will “significantly relax” that the debt-to-income level.