Banning DIBS is the right move
FOR many years, the
National House Buyers Association (HBA)
has been urging the Government to take measures to stem the steep rise
in property prices to avoid a “homeless generation” as current property
prices are far beyond the reach of many low and middle-income families
in urban and suburban areas.This is a ticking time bomb that will result in many social problems if left unchecked.
Real Property Gains Tax (RPGT)
The announcement of the revised rate of tax on gains made in the
disposal of properties, namely, the Real Property Gains Tax (RPGT),
formerly known as the Anti Speculation Act, under Budget 2014 is far
more superior to what had been proposed under Budget 2013 (
See table above)
This is because, typically, if the property is purchased directly
from the developer, it takes two years (for landed properties) and three
years (for strata properties) to be completed.
Hence, under the previous RPGT, speculators could purchase
properties from property developers upon their launch and then flip
these properties on completion (after two years) and having to pay 10%
(i.e. within the 3rd to 5th year).
It is hoped that the revised RPGT rate will deter speculators and,
at the same time, not punish genuine house buyers who buy for their own
stay or long-term investment. It is worth noting that buyers of
residential property could seek a once-in-a-lifetime exemption from the
tax.
Budget 2014 is best described as an “excellent mathematical formula”
to curb the unbridled escalation of house prices, which has in the last
three years skyrocketed. The Government has taken a step in the right
direction with measures to slow down the steep rise in property prices
due to false demand caused by excessive speculation fuelled by easy
housing loans and the previously low RPGT.
Foreign purchasers to pay more
HBA applauds the move to increase the minimum price of property that
can be purchased by foreigners from RM500,000 to RM1mil. Foreigners
must be prevented from “snapping up” property meant for the lower and
middle income.
This artificially inflates prices and creates a domino effect which
can result in higher property prices across the industry. This is
especially true for development corridors such as
Iskandar Malaysia which has seen foreign purchasers arriving in droves and scooping up properties with their advantageous exchange rate.
Banning the Developer Interest-Bearing Scheme (DIBS)
DIBS is popular with speculators as they pay nothing to make a
profit. Their initial down-payments and deposits are sometimes factored
into the purchase price by the collusive developers, and some unethical
financial institutions do not even require that the developer collect
the deposit that has to be paid by the so-called purchaser.
This is one of the factors which induces “bogus” house buyers (which I have written about in this column on Aug 31 entitled:
Of Speculators and bogus house buyers) who merely flip the property at the right time.
Kudos to
Bank Negara for heeding our call and banning DIBS. It may be worth noting that Singapore banned DIBS in 2009.
Considering the deep pockets of property speculators, the
effectiveness of these measures remain to be seen. However, they are
expected to make speculation unworthwhile. HBA praises the Prime
Minister for putting a stop to DIBS, which is one of the reasons
attributed to the steep increase in property prices for three reasons:
1. DIBS encourages speculation as the house buyer does not need to
“service” any interest/instalment during the construction stage. This
will “lure” and tempt many house buyers to speculate and buy into DIBS
projects hoping to flip on completion and make a quick profit with
little or no capital upfront. Connivingly, the interest element is
“serviced” by the participating developers.
2. DIBS artificially inflates prices as all interests borne by the
developer are ultimately imputed into the property price. This in turn
creates a domino effect which pulls up property prices in surrounding
locations.
3. Bank and financial institution staff conniving with developers
using the DIBS model should be investigated on their “modus operandi” in
financing those artificially inflated prices (DIBS + sales price) and
ignoring guidelines on prudent lending.
Banks and financial institutions are to be prudent and only provide
mortgage financing up to the fair value/market value of the property. In
this respect, a benchmark of fair value or market value is the current
properties available. Somehow, properties sold under DIBS are always
priced much higher; 15% to 20% higher compared with those without DIBS.
For standard condominiums costing RM500,000 without DIBS, should the
developer market such properties under DIBS, the selling price could be
as high as RM650,000. This creates a potential property bubble should
the developer default in “servicing” the interest and the
borrower/purchaser also defaults. The bank would only be able to recover
up to RM500,000 if the said property is auctioned at market value.
In the event of an economic downturn, banks saddled with too much
DIBS end-financing could collapse as the losses from such DIBS
end-financing will erode the banks’ capital.
The collapse of just one bank/financial institution could cause a systemic collapse of the entire financial industry.
Bank Negara
should take action against such bank and financial institution staff
who have provided both project financing and end-financing to DIBS
projects under the newly-minted Financial Services Act, 2013.
With the RPGT increase, banning of the DIBS and the Government’s
aspiration to supply more ‘ownership housing schemes’ at affordable
pricing, it is hoped that speculative demand for properties will
stabilise to a more realistic level. I have heard that many businessmen
do not do business anymore but indulge in property speculation as a
livelihood and for income.
It is akin to the stock market dealings that were rampant during a
‘bull run’. Certain things have to be stopped before they become worse
like the sub-prime crisis in the US.
If readers were to take a drive around completed projects, they will
find signboards advertising units for sale upon the delivery of keys.
If the purchaser is purchasing for his own occupation, why is there this
need to put up these signboards or appoint estate agents to dispose of
the units? It goes to show that some purchasers are merely speculators
(not investors) from day one and the banks and financial institutions
choose to “close one eye” despite knowing this.
Have the banks ever gone to the ground to check whether the units
purchased and financed are actually “owner occupied”? If the property is
“owner occupied”, the risk rating is lower and thus, he enjoys a lower
interest rate. But if it is non-owner occupied, it should have higher
interest rates. Borrowers of “owner occupied” properties are normally
required to make a declaration to that effect to enjoy a lower interest
rate.
But does the bank participate in this booking of credit risk?
If the property is non-owner occupied, the lending will fall under ‘real estate classification’ and not ‘housing’.
So, there may even be misreporting to
Bank Negara and subsequent national statistics.
This column continues next week.
- Contributed by Chang Kim Loong
CHANG
KIM LOONG is the honorary secretary-general of the National House Buyers Association (
www.hba.org.my), a non-profit, non-governmental organisation (NGO) manned by volunteers. He is also an NGO Councillor at the
Subang Jaya Municipality Council.
Related posts:
1. New tax rate on property to keep away flippers
2. Malaysia's high property taxes may not stop prices going up, sub-sales residential houses likely to soar!
3. Malaysia Tax Budget 2014 Updates
