Among others, this may lead to a subprime-like housing crisis.
Urban Wellbeing, Housing and Local Government Minister Noh Omar came up with a rather strange suggestion that developers be issued with a moneylender’s licence to enable house buyers to borrow money from them to buy houses. This ill-considered, foolhardy move, if it is implemented, will be bad for the well-being of the country and all of us.
He seems very concerned with developers’ inability to sell houses despite there being demand for these houses and even urged developers to apply for moneylender’s licences, the issue of which is incidentally under his ministry.
By doing that he hopes to solve this problem of a declining or slowing demand for houses caused by non-approval of housing loans by banks when developers instead lend to those who have been turned down by banks.
Noh was concerned that many house buyers, even if they can afford repayments, can’t get that 10 percent at least as down payment from the banks who do a proper assessment of the financial standing of the borrower before lending.
Housing developers can provide 100 percent financing in such instances, he reasons. But that will enable buyers to punt on the housing market without putting anything upfront. This is dangerous for both developers and house buyers!
He has not thought out or considered the myriad implications and ramifications of this radical move, which probably has not been considered, let alone implemented anywhere else by any competent government in the world. Why, he has not even considered it fit to consult his colleagues in the cabinet before he announced this utterly radical move.
Here are 10 reasons why his scheme should not be implemented in any form.
1. Developers are not moneylenders. Building houses is quite different from the lending business. If developers are going to lend, they need to establish that business – it cannot be done overnight, it might even take a few years. It is foolish to think that developers only have to get a moneylending business and then start operating.
2. Developers are conflicted when they lend to buyers. It is best to separate the two businesses of making houses and lending money. When you want to make a sale, you will tend to lend money to enable the sale of the house. This leads to major conflicts of interest and results in getting short-term profits while sacrificing long-term sustainability and viability overall.
3. It increases risk of non-payment of loans. Put the previous two points together and you put together two very combustible items into what is likely to become a major inflammatory conflagration in future when many buyers become defaulters, threatening the viability of both the house development and moneylending businesses as the buyer goes bankrupt.
4. Bank Negara can’t conduct monetary policy properly. The conduct of monetary policy, entrusted solely to Bank Negara, involves among other things, the control of credit availability, interest rates and the supply of money during different stages of economic growth. With a potentially huge parallel lending scheme under moneylending developers, Bank Negara’s role as an institution to control money supply will be crippled.
5. A huge financial sector will move out of Bank Negara’s control. The central bank currently oversees nearly all financial institutions, especially those which take deposits and lend money. If we negligently allow another financial sector to develop outside Bank Negara’s supervision, it increases the overall financial risk for the country because of lack of supervision of these new financial institutions.
6. It will lead to a snowballing of credit defaults. If housing developers lend money to promote their products, more and more people will buy these houses as vetting standards drop. Further out, many will become unable to pay their debts. This will lead to a snowballing of credit defaults… and eventual disaster.
7. It will lead to excessive speculation on houses. Making credit so easily available will lead to excessive speculation on property. When you don’t have to put up any money at the beginning to buy a house, you will tend to bet that you can make money when it is completed later, leading more people to buy houses.
8. It will further push up prices of houses first but prices will likely collapse later. As demand caused by easy credit goes up, house prices are likely to go up first. But as more and more houses are delivered, the inability to repay will become more and more prevalent, more houses will go back to the market and prices are likely to collapse after that, setting the stage for a meltdown.
9. Eventually both developers and buyers will suffer. What Noh saw as a win-win situation will become finally a lose-lose disaster. Many buyers, unable to pay their debts, will face bankruptcy and homelessness. As property prices spiral downwards, housing developers, whose money-lending business will be in tatters by now as bad debts increase, will face a final nail in the coffin as demand collapses. Even the best of them will die.
10. It will likely lead to a catastrophic subprime housing crisis. Points 1-9 point to Malaysia going through a subprime-like crisis that has never been seen before and from which it will take a long time to recover, if it ever does. All because a minister thought that giving money to those who can’t afford to buy houses is the way to solve the woes of both house buyers and developers.
Noh must remember his responsibilities as a minister in charge of housing. His duty is not to increase demand for properties for the benefit of developers. His duty is to ensure that the housing market develops in an orderly manner and only those who are able to afford houses buy houses, as far as that is possible. Yes, affordability is an issue and it’s up to him to come up with viable options.
His duty, when he has a proposal of national importance to make, is to consult the cabinet first and float it in public, to obtain all feedback before a final decision is made. His duty is to remember that there are professional institutions like Bank Negara to decide on monetary policy and matters which involve preservation and safety of financial institutions instead of developing a new class of moneylending developers.
Noh has overstepped his limits and it is time for the government to put a complete stop to this insane move to allow developers to become moneylenders. If it goes ahead, it will be a giant leap backwards and in one small step put paid to efforts made over decades to place all financial institutions under the supervision of one central authority, Bank Negara.