Opinions: Proposed 80% loan-to-value ratio (LVR)

By Sherry Koh | Sep 9 , 2010

On September 2, StarBiz reported that Bank Negara Malaysia (BNM) was engaging with banks on possible measures to curb excessive speculation on property prices. One of the measures discussed was whether the central bank will be capping the loan-to-value ratio (LVR) for mortgages at 80% in order to avert the risk of a potential property bubble. Currently, most banks provide loans of up to 90% of the value of the property. StarProperty.my collated feedback from various parties regarding this issue.

Datuk Michael Yam

President of Real Estate and Housing Developers’ Association Malaysia (REHDA)

“The local banking industry is well regulated and banks are very prudent and stringent in their credit assessment of borrowers. Banks have, on their own initiative, cut down loan margins to borrowers and only those who are credible and can afford to repay their loans will be offered a higher loan margin. Banks also are very selective of what projects they extend loans to.

It is better to leave it to market forces to decide as the banks’ stringent lending criteria is enough to ensure the quality of loans in the market.”

For more of Yam’s feedback on the issue, read ‘Banks to try and prevent speculation on property prices’.

Datuk Ricque Liew

Secretary-General of REHDA and Managing Director of Paramount Property Development Sdn Bhd

“In response to BNM’s intent to cap end-financing @ Loan/Value ratio of 80%, the adverse impact and repercussions to the whole housing industry will be very far reaching. All financial institutions have, for many years now, been very prudent in their credit evaluation of their intending borrowers through CCRIS (Central Credit Reference Information System) and CTOS (Credit Tip Off Services). It was due to this that we have very few incidents of NPLs (non-performing loans) during the 2008 American financial meltdown.

BNM should NOT intervene at all in this matter but continue to allow banks to carry out their own credit evaluation of borrowers (as what they have very prudently and effectively been doing over the past many years after our 1997 Asian Financial Crisis) and continue to provide purchasers with 90% end-financing for residential units. Don’t forget that the majority of our younger set of housebuyers would not be in the position to own houses if they can only borrow up to 80% of their house price. Home ownership amongst our younger generation SHOULD be encouraged especially so when EPF (Employees Provident Fund) is now even allowing monthly withdrawals from our Account 2 to facilitate homeownership.

The recent increase in residential housing prices are only occurring at a very few selected locations in the Klang Valley and Penang. It’s definitely not happening in all the other states like Kedah, Kelantan, Perak & Malacca, etc. As far as I can observe, there is no such over-heating of property prices outside of the Klang Valley & Penang and as such, I am of the opinion that BNM’s fears are truly unfounded.”

Datuk Yeoh Seok Kian

Executive Director of YTL Land and Development Berhad

"While we acknowledge that anti-speculative measures are necessary, the timing for the proposed 80% LVR is unfavourable – not only would it dampen the much needed buyers’ confidence for Malaysia to regain its footing but it is set to send the entire industry back into regression. A lowered LVR only serves to penalise buyers more so than curb speculation. Even if Bank Negara was considering limiting it to select groups, we feel it would not contribute much to boosting sentiments. As one of the region’s property hot spots, it is especially important that we continue to remain strong, and not allow the experience of the recent price increase be exemplary of where the market is headed, and stand in the way of its recovery.

In actual fact, the matter needs to be studied in greater depth together with developers, banks, other industry players and the Government. For instance, should Bank Negara relook the mortgage loans market since increased affordability of properties brought on by cheap financing schemes is one of the contributing factors? Or perhaps to address the shortage of housing supply (another cause of property price hikes), the Government should step in with administrative solutions by fast-tracking approvals or look into releasing land for new projects.

In the meantime, various measures are already in place to curb speculation, including the recent reinstatement of RPGT (Real Property Gains Tax), and while we welcome a more prudent management of the property market, we feel the timing is too early for extra precautionary steps at this stage."

Ho Hon Sang

Managing Director of Property Development Division, Sunway City Berhad

“We feel that it is not timely to implement the 80% loan margin cap on housing at this juncture. This is attributed to the fact that only the property market of certain sectors has experienced a good take-up rate and it is not across the board. In other words, the price increase in the property sector is not rampant

Additionally, this will deprive the lower-income groups from buying lower-priced properties. Currently, the property market is still under control and we should let market forces dictate the direction. Moreover, the banks are very prudent and only those who are eligible are given higher than the 80% margin loan. In short, not everyone enjoys the high financing margin.”

Dr Peter Yee

Author of two books and property investment coach

“Reducing the home loan margin to 80% is not the best strategy to control the property bubble. Why?

Speculators – it may cause prices to increase by raising the S&P (Sales and Purchase) price to secure a 100% loan; which is legal as long as both the seller and purchaser agree on the price within the acceptable market price range. This in turn will push up the valuation price of property (the valuation price is based on the average of the last 3 transacted prices).

The property bubble may occur when the unemployment rate increases. This may then push down the valuation price of property due to forced selling in the auction market. The chances of a property bubble for income generating property is relatively low, as long as the Yield is at least twice of the Fixed Deposit rate.

The Government may consider other options such as raising the RPGT (Real Property Gains Tax) from 5% back to the original 30% and/or gradual increase in interest rate. This may prevent the property market from a possible bubble.”

David Ong

Founder and President of Reapfield Properties Sdn Bhd

“The main issue is one of maintaining an economy that is sustainable over the long term. Speculative purchases do not help in achieving this goal. We need to thus implement policies that curb speculative purchases while ensuring that it is still easy to purchase a home for those genuine owner occupiers. The other consideration is that with any implementation of any restrictive policy, we still have to ensure that property as an asset class is still a viable investment instrument.

The ownership of a property is commonly the largest asset an individual is likely to own. Thus, a change of LVR to 80% has to be implemented with the above factors in mind to ensure a fine balance is maintained between a stable economy in the shorter term and a sustainable economy in the longer term. This could be achieved perhaps with the implementation of this rule only and restricted to investment properties. An individual’s main residence should be exempted from the 80% LVR rule. The issue of managing speculation is the collective responsibility of the financial institutions, real estate agents and the purchasers. Financing thus should be made available only to individuals who have a real and healthy capacity to service a loan.”

Zukarnine Shah

Director of Plenitude Berhad

I believe that this would certainly have an impact on first-time purchasers as they need more money to buy. Let's think about this rationally. They have to wait until they have enough money. If the house is worth, say RM300,000, they will need to come up with RM60,000 for the downpayment which is not a small sum. They would then have to defer their purchase. Like it or not, that will happen.

Our idea here in Malaysia is that we want to make houses here affordable for the public, especially the younger people who has just started out - want to start a family, get a car or buy house. With this measure, the younger generation might be forced to take a personal loan to put a downpayment and then get housing loan which will lead to financial burden.”

Marco Robinson

Entrepreneur and profesional speaker

"The discussion by Bank Negara to place certain conditions on house purchasers such as the discontinuation of the 5:95 and 10:90 mortgage opportunity, if enforced, will SLOW the property market down considerably and prohibit many aspiring property purchasers from entering into the property market. This in my view is a false economy, especially in a recession market and the general economy will suffer terribly as the banks will not be making as much money to be able to lend money to consumers in the market.

One of my staff has just got engaged and has just saved the 10% deposit necessary to put a deposit down. They are lovely people who want a lovely home and they have great jobs that pay them a consistent salary in an industry that is growing. Why should they be persecuted? Why should they be told they have to find another 10%? The bank will make money from them, their property will increase in value and they will probably have children and buy a bigger property in the future! We should be helping these people all day long, they are good people who deserve a good home.

In terms of singling out investors and speculators, the bank has a stringent application process which I believe is sufficient in establishing a person's creditworthiness. After all, what a bank needs to know is if the buyer can pay the loan, a bigger deposit does not necessarily guarantee this, and in fact can work against the bank, as you are encouraging people to use all their savings and borrow money from other sources including more money from credit cards to raise the funds, which puts people in a far more dangerous position, and to a bank a far more riskier prospect.

The legal fees, stamp duty, etc accumulate to sometimes 3 to 4% of a property purchase, which is not a small amount of money. To be honest and in my opinion to kickstart the economy, I would abolish paying a deposit to enable more people to get on the property ladder.

Does this sound risky? In terms of a general view it might sound like it is. However, if the valuation of a property is more than the mortgage required, this is a safe bet, as in the worst case scenario the bank could sell the house and still make money. This is why I always buy undervalued property and I always do it with no money down in 99% of the cases where I can.

Let's HELP people secure their futures instead of worrying about them!”