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Averting The Risk Of Mania
THE BUZZ
Bank Negara Malaysia has placed a limit on the loan-to-value (LTV) ratio to 70% with immediate effect for purchasers taking up their third mortgage to buy homes, in a bid to moderate “excessive” investment and speculation in urban areas. (Business Times)
OUR TAKE
The present scenario. In our 3 Sept property sector report ‘A Brewing Real Estate Mania’, we stated that the Malaysian property market is now at the early stage of a period characterised by fast rising property prices in the mid- to high-end residential segment, particularly landed ones, dizzying euphoria and the population’s exceptionally high confidence in investing in these properties. If the market is at risk of developing a mania, then the onus is on the policy makers to contain the situation before it gets out of hand. Therefore, the central bank’s latest move in limiting the LTV ratio on third mortgages for homes came as no surprise.
Adverse impact limited. Nonetheless, we do not expect the latest ruling to have too much of an adverse impact on the real property sector as:
? the LTV cap will not be a blanket cap but only applies to financing facilities for third property purchases onwards; and
? most banks already have in place internal risk controls limiting the LTV ratio to 80% for third-time property purchasers and higher end residential properties of more than RM700k.
The elasticity of credit. We believe that credit can be very elastic in times of euphoria regardless of credit tightening. Investors must bear in mind that so long as there is strong demand for credit and excess liquidity in the system, as is the case today, market players will continue to find innovative ways to circumvent any form of enforcement by policy makers, whenever possible. In the case of the LTV cap, for example:
? home buyers may purchase their properties under their children’s or spouse’s names while acting as guarantor to the mortgage loan;
? developers may provide rebates to the homebuyers which, in reality, is likely to have been built into the selling prices of the properties; and/or
? the financial institutions, pressured to put their excess reserves to work, may
come up with even more innovative financing schemes, if necessary, such as the so-called “cash-out refinancing”. Cash-out refinancing enables the property owner to take on additional loans by tapping on the equity from the properties he/she already owns to pay for the additional downpayment for his/her third mortgage.
A prelude to RPGT? Not necessarily. The cap on LTV, for example, is the sole prerogative of the central bank and the role of imposing further tightening such as the full reintroduction of Real Property Gain Tax (RPGT), lies with the Federal Government. As we noted before, in addition to political pressure, it is not easy for the politicians to decide when to take away the punchbowl. If they rein in too early, they may be blamed for the slowdown that may ensue. Doing it much later in the game raises the risk of pricking the bubble and then being blamed for the implosion. The third alternative, which we argued would more likely be adopted, is to progressively tighten their grip on speculation, while being mindful of not stirring panic. As such, we believe that the Government will not attempt to do anything too drastic at this juncture, such as reintroducing the RPGT, at least not until after the widely speculated General Election in 1H2011.
Reiterate OVERWEIGHT. We believe that Bank Negara’s latest measures in capping the LTV ratio would have very limited impact on the real property sector. In continuing with our theme, we maintain our OVERWEIGHT call on the Malaysian property sector and advise investors to accumulate on mid-to high-end residential property developers, particularly those with primary focus on mid- to high-end landed properties in Malaysia. SP Setia (Buy; TP: RM6.38) remains as our top buy for the sector while other stocks which should feature in investors’ buying list may include Sunrise (Buy; TP: RM4.33) and BRDB (Buy; TP: RM3.06). Any knee-jerk reaction on the latest measure will present an opportunity for investors to accumulate.
THE BUZZ
Bank Negara Malaysia has placed a limit on the loan-to-value (LTV) ratio to 70% with immediate effect for purchasers taking up their third mortgage to buy homes, in a bid to moderate “excessive” investment and speculation in urban areas. (Business Times)
OUR TAKE
The present scenario. In our 3 Sept property sector report ‘A Brewing Real Estate Mania’, we stated that the Malaysian property market is now at the early stage of a period characterised by fast rising property prices in the mid- to high-end residential segment, particularly landed ones, dizzying euphoria and the population’s exceptionally high confidence in investing in these properties. If the market is at risk of developing a mania, then the onus is on the policy makers to contain the situation before it gets out of hand. Therefore, the central bank’s latest move in limiting the LTV ratio on third mortgages for homes came as no surprise.
Adverse impact limited. Nonetheless, we do not expect the latest ruling to have too much of an adverse impact on the real property sector as:
? the LTV cap will not be a blanket cap but only applies to financing facilities for third property purchases onwards; and
? most banks already have in place internal risk controls limiting the LTV ratio to 80% for third-time property purchasers and higher end residential properties of more than RM700k.
The elasticity of credit. We believe that credit can be very elastic in times of euphoria regardless of credit tightening. Investors must bear in mind that so long as there is strong demand for credit and excess liquidity in the system, as is the case today, market players will continue to find innovative ways to circumvent any form of enforcement by policy makers, whenever possible. In the case of the LTV cap, for example:
? home buyers may purchase their properties under their children’s or spouse’s names while acting as guarantor to the mortgage loan;
? developers may provide rebates to the homebuyers which, in reality, is likely to have been built into the selling prices of the properties; and/or
? the financial institutions, pressured to put their excess reserves to work, may
come up with even more innovative financing schemes, if necessary, such as the so-called “cash-out refinancing”. Cash-out refinancing enables the property owner to take on additional loans by tapping on the equity from the properties he/she already owns to pay for the additional downpayment for his/her third mortgage.
A prelude to RPGT? Not necessarily. The cap on LTV, for example, is the sole prerogative of the central bank and the role of imposing further tightening such as the full reintroduction of Real Property Gain Tax (RPGT), lies with the Federal Government. As we noted before, in addition to political pressure, it is not easy for the politicians to decide when to take away the punchbowl. If they rein in too early, they may be blamed for the slowdown that may ensue. Doing it much later in the game raises the risk of pricking the bubble and then being blamed for the implosion. The third alternative, which we argued would more likely be adopted, is to progressively tighten their grip on speculation, while being mindful of not stirring panic. As such, we believe that the Government will not attempt to do anything too drastic at this juncture, such as reintroducing the RPGT, at least not until after the widely speculated General Election in 1H2011.
Reiterate OVERWEIGHT. We believe that Bank Negara’s latest measures in capping the LTV ratio would have very limited impact on the real property sector. In continuing with our theme, we maintain our OVERWEIGHT call on the Malaysian property sector and advise investors to accumulate on mid-to high-end residential property developers, particularly those with primary focus on mid- to high-end landed properties in Malaysia. SP Setia (Buy; TP: RM6.38) remains as our top buy for the sector while other stocks which should feature in investors’ buying list may include Sunrise (Buy; TP: RM4.33) and BRDB (Buy; TP: RM3.06). Any knee-jerk reaction on the latest measure will present an opportunity for investors to accumulate.
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