Juwai – IQI forecast: Bank Negara To Leave Rates Unchanged to “Avoid Surprising The Market”

Press Release: Forecast: Bank Negara To Leave Rates Unchanged to “Avoid Surprising The Market”

Kuala Lumpur (31 October 2023) — Juwai IQI Co-Founder and Group CEO Kashif Ansari today released this forecast regarding Bank Negara’s upcoming sixth and final Monetary Policy Statement of 2023. 

“We believe Bank Negara will leave the Overnight Policy (OPR) rate unchanged on Thursday to avoid surprising the market or squeezing the economy,” Ansari said. “The housing and financial markets like when rates fall, but they don’t like surprises, and a decision not to adjust the rate has been widely expected. 

“All indicators suggest that we don’t need higher rates. Inflation is under control and economic growth has cooled. Because the Bank was one of the first in the world to start raising rates in this cycle, Malaysia was able to beat inflation without a recession. That has been good for the housing market. 

“The Ringgit has fallen low against the U.S. dollar, and some have called for Bank Negara to increase the OPR to help stem the Ringgit’s fall. Interest rates are lower in Malaysia than in the U.S., so many investors are moving their money to America for the higher returns on cash and bonds. By increasing the OPR, the Bank would hope to help the Ringgit regain some of its value. The Bank may yet do this in 2024. 

“Strong household finances and strong employment are two of the indicators we look at to evaluate how housing demand is likely to trend. Both are in good shape. 

Household Finances Support Homebuying 

“One of the statistics we look at to get a sense of household finances is the household debt-to GDP ratio. In June, that ratio was 81.9%, hardly changed from 81% in December of 2022 and much better than 84.4% of a year earlier.

“Another ratio is the median debt to-income (DTI) ratio. When this goes up, it means families are taking on more debt relative to their earnings, which often leads to more families ending up unable to pay their mortgages and losing their homes. The DTI ratio is basically stable at 1.4. Among those earning less than RM 3,000 per month, it’s an even better 1.3. 

“The third indicator that helps us know if households are in good financial shape is the median debt service ratio (DSR). For newly approved household loans, that ratio is 42% and for outstanding household loans it is 36%. Both are safe numbers. The debt service ratio tells us that households have more than enough income to pay off their debt. 

The Incredible Shrinking Overhang 

“The overhang of unsold housing units started shrinking in 2022 and has kept shrinking through the first half. The peak of unsold housing was 183,900 in 2021. By the second quarter of this year, it had fallen to just 141,900, and the trend continues to be downward. The supply of unsold expensive high rises improved the most. 

“The volume of unsold housing is now 12% lower than in 2019 and 23% below its 2021 peak. That’s a big relief to the housing industry. It helps stabilise pricing and makes price trends more predictable. 

Affordable Housing Sells Faster 

“Affordable housing is selling faster than higher priced homes, even though it is among relatively expensive high-rise homes that the oversupply of units has most improved.

“Houses that are priced RM 500,000 and below made up nearly 80% of all purchases in the first half of the year. 

“We may see a shortage of homes in this mass-market price range in 2024 because homes priced RM 500,000 account for a smaller and smaller share of new construction. In 2022, these more affordable homes made up 71.1% of all newly launched residential properties. In the first half, however, their share dropped by more than 13 percentage points to just 58%. 

Steady Home Price Growth Is Sustainable 

“Home prices are growing at a sustainable rate that is lower than the pre-Covid level. In the first quarter of 2023, prices climbed 4.8%, higher than the 3.9% of the prior quarter. This stronger pace is nonetheless below the 5.3% long-term average during the years 2015 to 2019. We think it is likely that price growth will continue into 2024. 

“We see three factors driving this demand. Homebuyers have more money and are more likely to have good jobs. Also, buyers want to take advantage of the stamp duty exemptions provided by the Malaysian Home Ownership Initiative. 

“Household finances are strong, household debt is manageable, and private sector wages are up by 4.1%, which boosts household income. Employment is also up, which also contributes to household income and to the confidence to buy a home. The number of people with jobs increased by more than 208,000 in the second quarter alone. 

“Bank Negara’s decision to leave the Overnight Policy Rate unchanged this month will help sustain our current economic growth and help more people afford to buy their own home, which is the key to economic security. In 2024, if the U.S. Federal Reserve continues to maintain its “higher for longer” interest rate regime, Bank Negara will come under more pressure to raise rates and stem the Ringgit’s fall.” 

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