Friday, February 18, 2011

Are We Creating A Malaysian Sub-Prime Market?

Also from Monday’s news (excerpt):

No-deposit housing package for low, middle income group

KUALA LUMPUR: Syarikat Perumahan Negara Berhad (SPNB) will launch a mega nationwide promotion, offering 10-30percent discount to attract prospective buyers for houses priced between RM35,000 to RM250,000.

The houses will be offered to low and medium wage earners who will not have to pay a deposit to own such houses.

SPNB managing director Datuk Dr Sr Kamarul Rashdan Salleh said he was confident of achieving the targetted sales of 6,300 houses for the year, through the promotion.

"In 2010, SPNB sold about 3,000 units worth about RM400mil, and made a pre-tax profit of about RM15mil.

"Based on last year's success, SPNB is confident that sales this year will double since we are going to sell in cooperation with Cagamas Berhad (Cagamas), while offering an attractive package, including, a discount of between 10-30percent - depending on the location - along with free legal services.

"Apart from Cagamas Berhad, Malaysia Building Society Bhd and Bank Simpanan Nasional (BSN) are also involved," he told Bernama in an interview here Monday.

I’ll admit…I’m being alarmist here. We’re not talking about the origination-securitisation model that brought so much trouble to Wall Street during this past crisis. It was a combination of loose monetary policy, benign regulatory regimes, the search for yield, default insurance, structured products, and let’s not forget legislative support, that helped create the mess that turned into a global financial crisis. US Sub-prime defaults were just the trigger, not the whole smoking gun. But the US sub-prime market had similarly innocuous beginnings in the early 1990s.

There’s more than a little to worry about encouraging low income households to invest in housing that they could not otherwise afford. That’s a pretty hefty investment to make, especially if the price-income ratio is high as it would be for this income class. More importantly, investment in owner occupied housing only makes sense if renting is more expensive (arguable), house prices continually rise (not true), and opportunity costs (i.e. the risk-adjusted yield from other investments) is low.

It has to be recognised here that Malaysia’s house price “bubble” is confined to only a few hot spots like KL, and even then it depends on location. The pressure of continuous urbanisation will ensure that metropolitan areas (with the possible exception of Penang island) will see housing prices rise in the foreseeable future. But what’s true of the cities is not true of the country in general, especially since there’s an overall glut in actual living quarters relative to the population (ratio of households to living quarters; source Census 2010):


So while I’m pretty sanguine about helping people with housing in KL and Selangor, I’m not so sure about Johor, Kedah and Sabah, as SPNB is planning to do. While outright capital loss is unlikely, you’re potentially burdening low income folk with an investment that’s not returning enough to compensate them for the risk they’re taking – they might actually make more from renting existing housing and investing the difference in higher yielding investments. In other words, investing in housing might actually be relatively welfare reducing over the long term.

There’s also the problem that this group would be far more vulnerable to changes in employment and wages, and thus more likely to miss mortgage payments – in which case housing equity might be lost, and they’ll be far worse off than they were before, or relative to the alternatives.

I seriously doubt the wisdom of this course. And I’m not even going into the potential fiscal costs of having MBSB and BSN providing the financing – both have had to either be rescued or needed central bank support in the past.


  1. hi bro hishamh

    Proper collateral management should help mitigate the risk, have a look at this for a consolidated framework to build a "Public" Infra to assist the banks.

  2. Cool post - though I'm not sure that 100% home ownership is necessarily desirable. I worry less about the risk to the banking system (MBSB and BSN aren't in the TBTF category), as I am about loading low-income people with potential debt. Especially since there's the question of whether property in itself is a desirable asset class to sink so much financial resources into, when we have excess supply (taken up by transients/immigrants?).

    But I second the call for a true, higher frequency, house price index. Everybody's operating blind here.

  3. Very thoughtful and thought-provoking post. I'm no economist, but common sense (and perhaps a sensible upbringing?) has always taught me that you should only buy what you can afford. And that wisdom should be applicable for both immediate and long-term purchases.

    I've contemplated the whole 'bubble burst' scenario in Malaysia, and I've been told to think otherwise multiple times based on the premise that our central bank is more conservative than the US (i.e. people not owning more than one credit card etc; not sure if this is actually true though-- and one badly managed credit card is enough to put someone into a deep debt hole). But as you say, the effect on the banking system is not my main concern but the sudden drop from false wealth (due to heavy borrowing and the use of tomorrow's money) to real and unshakeable poverty for many people is what I'm worried about.

    This has the danger of being a superficial observation but;

    With jobs and wages commonly advertised at around RM1100-RM2000 for degree holders (the same rate since the last four years with little or no increase) AND inflation of common goods AND luxury items becoming even higher in demand (smart phones, fancy drinks, fancy dinners) -- where's all the money coming from?

    1. @ only Kye,

      The one who told you not to worry wants to sell you something.
      In Malaysia, politicians control and own the banks by proxy. The easiest way to rob a bank is to own one.

  4. Hi,

    Not true that you can only have one credit card - BNM regulates this by imposing a RM50 per card.

    Second - most housing demand doesn't (and shouldn't) come from new graduates. Most can't afford to buy homes (low incomes and lower savings), and this isn't something new. Trying to overcome this reminds me of Canute trying to order the tide to go back. All you'll do is get wet and risk drowning.

    Shelter is a basic human right, but owning it isn't.