housing – the _

[2853] Bank Negara versus everybody else’s 40% housing loan approval rate

Bank Negara Malaysia is having none of it. They are tired of people blaming them (too much) for the generally weak residential property market in the country.

In its 1Q17 Quarterly Statistical Bulletin, BNM wrote housing loan approval rate over the past few years had not fallen, citing statistics that 74.2% of all applications were approved in the first quarter, and this number almost matches the 2012-2016 average. This is in contrast to the 40% approval rate often cited in the media, which originates from developers and other players in the private sector. With this as a proof, the central bank calls the 40% rate a myth.^[1]

Except, BNM may have been too hasty in passing a conclusion and they may have overlooked an alternative method to calculate the approval rate.

The central bank calculates the ratio by taking the number of housing loan applications approved by all banks in Malaysia to the number of housing loan applications received by the banks during the same period.

But the 40% rate is calculated based on total value of all housing loans approved, to the total value of application in the banking system. Some analysts calculate it differently by lagging the value of approved loans by a month in an attempt to capture the fact that banks take several weeks to process and deliberate on any application. The lagging would change the number, but the overall trend would be pretty much the same.

You can see the rates under the value-approach here:

Housing loan approval rate among Malaysian banks, value-approach. Source: Bank Negara Malaysia

The 40%, in fact, comes from a database maintained by BNM. Specifically, you can get the 40% rate by taking the value of residential property found file 1.10 and divide it by the corresponding value found in file 1.12.^[2]

So, the 40% it is not a myth. That particular rate has not been picked out of thin air. It is just that BNM may have overlooked the fact that there is a different way to calculate the rate. Instead of volume-approach, there is a value-approach alternative.

Which method is more appropriate, now, that is a different and a much more interesting discussion altogether.

Mohd Hafiz Noor Shams. Some rights reserved

^[1] The overall housing loan approval rate remains high at 74.2% (average 2012-2016: 74.1%). The approval rate is the ratio of the number of housing loan applications approved by all banks in Malaysia to the number of housing loan applications received by the banks during the same period. In 1Q 2017, banks approved a total of RM22.3 billion of house fi nancing to 90,137 borrowers. Of these, more than half was for buyers of affordable housing units priced below RM500,000. [Lim Le Sze. Debunking the Myth: Property Measures Have Led to Higher Loan Rejection Rates. BNM Quarterly Bulletin. Bank Negara Malaysia. Accessed May 26 2017]

^[2] See the BNM Monthly Statistical Bulletin.

[1707] Of build-sell or sell-build?

Tony Pua (okay, okay, MP Tony Pua) raised an interesting issue in his blog. There, he expressed his approval for the build first and then sell later arrangement (build-sell) proposed by the Selangor state government in replacing sell while building arrangement (sell-build?).^[1]

While the build-sell model does have its benefits, namely having the potential of reducing the number of cases of buyers being cheated by developers, the currently popular sell-build structure does have its benefits too.

First of all, it allows individuals to purchase home at a cheap price. Developers, assuming there is no fraud involved, will be willing to sell yet to be built or completed homes at a discount to accommodate any risk undertaken by the purchasers. Furthermore, time value for money faced by the developers encourages them to accept smaller amount from purchasers here and now compared to any time in the future.

Secondly, it encourages developers to be bold and thus, encourages growth in the construction industry. This is due to convenient cash flow. If the developers had to wait for months before they could see the first cent of revenue coming in, I think a lot less developers would be willing to participate in building homes. Or at least, smaller developers would have less opportunity to do business. Small developers most likely could not withstand the large net outflow of cash they would have to suffer between the start of construction and completion date. In the end, not only the construction industry could see less growth, a build-sell world could create a world close to a monopoly in which only large developers which could withstand sustained net cash outflow until the date of completion survive. I am well aware that financial institutions are there as underwriters but then again, through what limited experience I have, banks are very risk-averse and that increases cost of doing business.

Anyway, I am ambivalent in the debate between build-sell and sell-build, if there is a debate at all. But I am certainly would be unhappy if the state decided to coerce developers into adopting a particular structure.

Mohd Hafiz Noor Shams. Some rights reserved

^[1] So when I read that the Selangor state government intends to implement the “build then sell” concept of housing, I’ll all hands in support. [Build The Sell. Philosophy Politics Economics. July 2 2008]