Affordable Homes: Finance Is Not The Problem

In a rather unusual move, BNM issued a statement yesterday on the current hot topic of housing (in full, emphasis added):

Responsible lending guidelines ensures borrowers' affordability

This is with reference to a media report on requests for Bank Negara Malaysia to review the lending guidelines in relation to the extension of the loan repayment period from 35 to 40 years.

Bank Negara Malaysia wishes to state that financial institutions will continue to lend to individuals who can afford to take on a housing loan, including for the purchases of their first homes. In July 2016, outstanding housing loans extended by financial institutions continue to grow at 10.1%y-y and totalled RM460.2 billion. About 75 per cent of borrowers (approximately 1.5 million borrowers) with housing loans are first time house buyers.

Access to financing is not the main problem confronting potential buyers of affordable houses. The fundamental issues that require resolution are affordability and the shortage of supply of reasonably priced houses.

The implementation of Bank Negara Malaysia's responsible financing guidelines serves to protect individuals' interests so that they borrow within their capacity to repay the loans throughout its tenure. This is to prevent borrowers from falling into financial hardship due to excessive debt burden that may lead to foreclosures which will undermine the objective of house ownership.

Financial institutions are responsible to establish that borrower's income after statutory deductions, expenditure on necessities and all other obligations are able to meet debt repayments. This is to ensure that borrowers can continue to service the loan and have sufficient financial buffers for living expenses and deal with any future increase in financing rates and rising costs.

The maximum housing loan tenure of 35 years is more than sufficient for borrowers to settle their housing loans by their retirement age. For example, if the housing loan is offered when the borrower is 25 years old, a financing tenure of 35 years would extend to the retirement age of 60 years old.

In addition, increasing the loan tenure to 40 years will further add to the total cost of financing without significant improvements in the affordability of one's monthly instalment (see table 1 and table 2).

The two tables provide examples of the differences in monthly payments for loan tenures of 35 and 40 years and the total financing costs: it works out to a reduction of monthly installments by 4.8%, but increases the interest costs by 8.8%. In other words, the costs outweigh the benefits. Increasing loan tenures is no better an answer than providing bridge/mezzanine financing from developers, and doesn’t address the fundamental questions of affordability or credit risk. And we don’t want to go the way of Japan, which has multi-generational housing loans.

Apropos of that, 5 months ago and before all this blew up, BNM issued a call for papers for their annual economics research workshop, to be held on Oct 10 this year. The title? “The Housing Market: Issues and Policy Options.” Papers presented will be published online on BNM’s website. Can’t wait.