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Real Estate Sector Walking On Tight Rope
Malaysia Perspective | 29 August 2012
By:

By: Yang Ming Wan

While the infrastructure developments of the Greater Kuala Lumpur project under the Government’s grand Economic Transformation Plan are just being started, Prime Minister Najib Razak recently presided over the launching ceremony of the RM26 billion Tun Razak World Trade Center. Construction of this international financial centre is expected to begin soon.

Next up will be the construction of the Kuala Lumpur City Centre MRT system and the hundred-storey Warisan Merdeka skyscraper. The Government’s push for these infrastructure and building construction projects is motivated by the desire to stimulate the economy and to grow it steadily to reach the goal of becoming a high-income country.

Rising Cost Of Cement
Yet, even before these projects could bring about any positive economic effects, they attracted a wrangling that involved the inflating costs of building materials. The Real Estate and Housing Developer’s Association of Malaysia and Building Materials Distributors Association of Malaysia announced in end-July that, as of 1 August, the price of one pack of 50 kilograms cement will be raised by RM1, which is equivalent to a 6.2 percent price hike.

These two associations later argued that the price hike of cement is unreasonable and requested the authorities to launch an investigation. Regardless, the cement price has risen. This will bring about a chain reaction of price hikes in other building materials. With the rising costs of these raw materials, property prices will inadvertently rise further.

Once property prices are on a rally, sales will also rise in response to inflationary effects. On the surface, this will reflect a rise in our gross domestic product and strengthen economic growth, thus appearing to push us one step closer to the goal of becoming a high income country. However, this phenomena will in fact further burden the people with a higher cost of living, and also be at odds with Bank Negara’s recent policy of moderating housing loans.

Mortgage Take-up Rate Shrunk 12% In June
The June mortgage figures released by Bank Negara showed that, despite a year-on-year growth of 12.6 percent in the total loan amounts, housing loans have shrunk by up to 12.2 percent year-on-year. With the rise in one and a drop in the other figure, the gap between mortgage and total loan yawed to nearly 25 percent. This is obviously the result of banks adhering to the responsible lending guidelines introduced by Bank Negara. Strictly speaking, this measure taken by Bank Negara serves to redirect bankers’ lending focus from non-productive housing loans to the productive commercial and industrial loans.

For this reason, commercial loans in June grew year-on-year by 13.6 percent and consumer loans increased by 11.8 percent. The growth of such loans contribute to the healthy growth of our economy, as consumer loans can directly stimulate the economy and indirectly stimulate industrial and commercial activities, which will in turn raise production. On the other hand, a significant growth in commercial loans will help to raise production capacity. When these two factors work hand-in-hand, the economy can grow healthily on the back of productive activities and add a meaningful push towards us becoming a high-income country.

However, what is of real concern to the banking sector is the subsequent trend of bank loans. Approved loan applications in June has already decreased marginally by 2.1 percent year-on-year, a result of the sharp drop in mortgages.

Fear Of Falling Into An Awkward Situation
The impact of large-scale infrastructure developments on the building materials and construction industries is foreseeable. This growth strategy of the government serves to kill two birds with one stone: on the one hand, this will provide the people with a better infrastructure that will bring about national and economic developments; on the other hand, this will ensure that the Malaysian economy will be cushioned from the poor external economic conditions and achieve steady growth through the chain reaction that infrastructure development will cause in the construction industry, which will stimulate domestic consumption and, ultimately, domestic demands.

This was originally a good plan, but for the residential property sector, which falls squarely in the middle, it is caught in a quandary: on the one hand, Bank Negara is tightening housing loans to rein in the growth in non-productive loans; on the other hand, housing prices are rising in tandem with the rising prices of construction materials. If this situation continues, the property market will fall into the awkward situation of good prices but no buyers. This is bad news for both buyers and sellers in the market.

Judging from the authorities’ recent stance of tightening control over whichever situations that would affect economic activities, if cement prices are allowed to rise unchecked, the Government is expected to make adjustments in other areas, including its grip on housing loans, in order to alleviate the awkward situation in the property sector.


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