Wednesday, November 22, 2017

Is the high-end property ‘freeze’ a case of a hare-brained attempt to hose down a fire which has already burnt to ashes, or worse, cause a flood and further add to the woes?

On 17 November, Bank Negara Malaysia (BNM) produced a report highlighting the mismatch in supply and demand of property developments in Malaysia.

The BNM Governor, Tan Sri Muhammad Ibrahim pointed out that the supply-demand imbalances in the property market has increased since 2015, pointing to the decade-high of unsold residential properties. There were 130,690 unsold units at the end of March this year, with 83% priced at above RM250,000.

The knee-jerk reaction to the alarming report was the announcement two days later by Second Finance Minister, Datuk Johari Abdul Ghani that the government had issued a directive temporarily stopping developments of shopping malls, commercial complexes and condominiums valued about RM1 million from November 1.

One can tell that it was a hare-brained policy attempt because the day after, the Works Minister, Datuk Fadillah Yusof said that the directive was not a blanket freeze and that approvals would be evaluated on a case by case basis.

Datuk Johari then added, on November 21, that the freeze would only affect projects that had not been approved and the length of the freeze would depend on a continued assessment of the situation.

The question is, how did the Government allow the situation to develop to such a state of gross mismatch in the first place?

Actually, the issue of imbalances in the property market was already highlighted by BNM in its 2015 annual report. And the oversupply in the housing market has since then almost doubled between 2015 and 2017.  In fact, Bank Negara’s figures for the property supply and demand come from the National Property Information Centre (NAPIC) located under the Ministry of Finance (MoF).

As the BNM Governor opined, “we have raised these issues for more than a year. Exposure of financial sector within this area is within a comfortable level. But if we're not careful, the oversupply could have a negative impact on the economy.”

Hence the question now is, given the fact that the milk is already spilled, will the seemingly drastic knee-jerk ban on luxury condominiums, shopping malls and commercial complexes solve the problem or trigger even more problems?

Investors, both domestic and foreign, will tell you that what they fear and hate more than bad policies are inconsistent, uncertain and ad-hoc policy-making.  The latter results in constant unanticipated changes and frequent policy U-turns which makes it impossible for business to plan their investments and measure their expected returns.

In this case, there are so many unanswered questions based on the Cabinet's hasty policy decision.

Has MoF asked the real estate sector – why is it that despite the excess supply of “luxury condominium”, developers continue to build them at that price?  Are Malaysian developers really that stupid to invest in projects which cannot sell?

Has MoF conducted a study to determine if a ban on the “luxury” sector will reallocate investments into the “affordable” property sector?  If it doesn’t, will the ban merely stop property and construction activities and consequently trigger an economic slowdown and lower employment opportunities?

One of the biggest questions that needs to be asked is, what is considered a “luxury” project?  The Bank Negara report used RM250,000 as the benchmark.  However, the Government’s own affordable housing agency PR1MA have properties priced between RM100,000 and RM400,000, although prices tend to be skewed more to the higher-end.  On the other hand, the latest MoF ban appears to apply to only properties priced above RM1 million.  Hence, are we prescribing medication to the wrong patient?

Worst, the blanket ban does not take into account of regional factors and imbalances.  The BNM Governor clearly stated that Johor is poised to have the highest number of unsold residential properties and potentially the largest excess supply of retail space. Hence is a nationwide ban of any kind the right prescription or will it instead cause economic distortions in other states and regions?

We call upon the Minister of Finance to provide not only clarity to the hare-brained “temporary ban” decision but also to justify how such a ban will actually solve the “supply-demand imbalances” in our property sector.  He should also take in cognizance of the fact that BNM’s 6-policy prescription to resolving the problem did not involve an outright ban on types of development.  Otherwise, the unintended consequences of such a crude policy prescription would worsen the effects on our already fragile economy.
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