This is very important for the property market longevity. Imagine if all the banks that we know today have majority of their lending to only property related loans. Yes, only to commercial, residential or any type of property. Well, it’s great if the property market continues to increase in price. The bank’s profits increases tremendously and more people borrow to buy properties and the cycle continues. However, what happens if the property market faces a downturn? What would happen when these home owners start defaulting on their loans? Well, that’s the end of the banking system, together with everything else, including the economy. If you think this could not happen, think again, something similar happened in 2008 in US.
For Malaysia, the cooling measures were implemented to ensure the property market does not continue to rise indiscriminately. So, what’s the current percentage of Malaysia’s financial institutions to the property sector today? Based on Bank Negara’s Financial Stability and Payment Systems Report 2014 total exposures amounted to RM628.5bil or 23%. It was 21.9% in 2013. Financial institutions mentioned here includes every institution which lends money including banks, development and selected non-bank financial institutions and insurers as well as takaful players. Out of this total, banks have the lion’s share at 95.4%. Out of this, about 65% of bank exposures to property is concentrated in the residential property end-financing market. About 30% is for the end-financing for the purchase of land and commercial properties.
This 23% meant that the exposure to the property sector is increasing. Is this bad? I personally think this is ok. In Singapore, the banks need to follow a ceiling of 30% when lending to property related loans. This is required by Monetary Authority of Singapore. However, this was said to be in review to relax it further. If the percentage is too low, is it good? For a developing country like Malaysia and where the largest group are still below 30 years old, a low percentage is not good. However, there is a reason for setting a limit.
Due to this 23 percent which is already higher than previous year, some analysts in an article in a local English daily are saying that more cooling measures are coming, even if it is more selective ones. Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said that agrees there is a possibility that macro prudential measures to curb speculation in the property sector could be unveiled in the near terms in view of the high total exposure of financial institutions to the property sector. Another reason for this selective measure is because property prices remain high and is currently 6.6 times of household median income.
So, when you borrow for your next home loan, remember to just get to know if the Malaysian banking sector is overexposed to property. It may be prudent not to buy when you learn that the current 23% has become 32%? Then again, this is unlikely to rise further as there are no signs that the cooling measures would be relaxed anytime soon.
written on 23 Mar 2015
next suggested article: 1MDB is “manageable risk” – Fitch Ratings