Loosening Housing Loan Rules is not the solution. Here’s why

Posted by: Aezhad
date: 25th May 2019

Why relaxing Home Loan Criterias is not the Solution to the Malaysian Housing Crisis.

Banks have become a lot stricter on giving housing loans over the years and that has been a key contributing factor to Malaysia’s current housing situation.

The Real Estate and Housing Developers Association (REHDA) has stated that there have been numerous government efforts to assist Malaysians with home ownership such as stamp duty exemptions for houses up to RM2.5m and this incentive, was not only for first-time buyers but also those acquiring their second homes.

Despite that, Malaysians are still unable to gain access to their own homes due to the strict requirements and high rejection rates from the banks.

This begs the question, is it true that Malaysians are unable to buy thieir homes due to these strict loan approval conditions? Based on the findings of the Bank Negara Malaysia (BNM). the success rate for loan approvals stand at 71.3%.

What does this mean? This means that for every 10 individual that applies for a home loan, 7 out of 10 will have their loans approved. Would you still consider this ‘strict’?

“The main responsibility of a bank is to protect the deposits of their customers. This means that banks must practice a high duty of care before approving each and every loan.”

They must be reasonably certain that the potential borrower can afford  to service their monthly loan installments.

If banks in Malaysia are forced to relax their credit standards for an all out rescue mission to provide every Malaysian a home we would be doomed to fail.

We have to learn from history and prevent the creation of a similar situation like the American sub-prime mortgage crisis in 2007, which later spiraled into the worst global financial crisis since the 1930-s Great Depression.

It is important to realize that there are many factors contributing to to our housing crisis besides the conditions set by the bank. The root of this problem lies deeper than the criticism of REHDA towards the rules set by the banks.

From a supply perspective, overall housing costs needs to be lower. On the other hand, from a demand perspective, there needs to be a net increase in the incomes and purchasing power of our Malaysian consumers.

In 2017, the median income for the average Malaysian was at RM2,160, whilst the monthly installment for a house priced at RM404,345 is RM1,914 per month.

We’re sure that you can see how this ends – How does a person with a monthly earning of RM2,160, come close to owning a house?

Developers need to shift their focus from merely constructing top end high profit luxury residences, to  providing more reasonably priced and affordable houses.

Further insights from BNM has shared that on average, the price of a decent house is three times more than the median annual income.

As of 2016, houses in Malaysia are still beyond affordable if compared to the international standard 5.0 median. It is estimated that the average Malaysian can only own a home priced at RM282,003.

Considering the actual median price of a house is RM313,000, this surpasses a majority of Malaysians capacity as the
median income of a household is only RM5,228.

If REHDA truly wishes to help Malaysian attain home ownership, it will take more than reviewing stringent housing loan requirements imposed by banks.

Broadly speaking, there are 3 interrelated efforts that can spark hope for this crisis:

  1. Introduce regulations and policies that address rising cost of housing which exceeds household income;
  2. Oversee housing offers and promotions with overpriced properties to increase affordability;
  3. Monitor and manage the supply and actual demand as to enhance balance of transactions

In short, the root of the problem lies in the rising prices of homes stirring out of reach from the average household income.

More efforts need to be consciously delivered to address the surge of luxury high end housings sprouting endlessly, further increasing the gap of affordability across the nation.

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