When I first heard about Budget 2019 P2P lending scheme for homes, initially I was intrigued, but then immediately thought of potentially mutiple issues that may arise from such schemes. But before I give it a serious thought, I saw the following news...
...then it all makes sense.
This all seems to fit into the needs of certain individuals.
Nepotism at work
This is nepotism, cronyism or whatever you name it, at work. We all know someone (Let's name him/her Fox) has been a staunch Pakatan supporter but fitting our national budget to suits their needs? That is simply outrageous. How can Fox launch a scheme within two days after the Budget 2019 announcement? Just look at the website and you know that these did not happen overnight. Properties are already listed there, some are already funded. I can only speculate one scenario: Fox may have already knew Budget 2019 will announce such initiative beforehand. If I'm a betting man, I would even wager that it was Fox who planted this idea to MoF because the example mentioned in Budget 2019 looks exactly the same as the platform's model.
Unfair competition due to insider information
Before I go into the merits and demerits of property P2P lending scheme, the impact of Fox having such insider news and first mover advantage means any that P2P entrepreneur would now need to play catch up with Fox. Simply because they are at least 6 months or even few years behind. Before Budget 2019, Fox already has the concept, own company funding, property developer's projects and even banks as first financial contributors in place. Any competitors based on similar concept will have to start from scratch and will be left far behind. Moreover, the launching was attended by none other than the Prime Minister and Minister of Finance. All these insider information and implicit government endorsement creates an utterly unfair competitive landscape.
Home ownership should not be via shortcuts
For me, the concept itself is dangerous. Because any P2P lending scheme ultimately need to be sustained through returns and thus any products or service involved inevitably need to be packaged as a financial product. But a house is more than just a financial product as many see that as a basic necessity. It is a sensitive issue, especially among those who cannot afford a house.
Instead of addressing property affordability, or encouraging prudent spending and borrowing, many stakeholders are irresponsibly encouraging home ownership among those who cannot afford it. If you cannot own a house, save for it. If you are earning less than what everyone else does, work harder or spend less. If majority of the population are doing that and yet house prices remain out of reach, that simply means a property bubble is forming and due to correct.
Instead, now we hear of calls to extend the property loan tenure to maybe 40 years, or do away with the 10% down payment requirement, then now this P2P scheme. These are all shortcuts trying to circumvent the core issues. rather than facing the problems head on and address them.
Exploring the property P2P scheme
There may be other genuine property P2P scheme concept coming out and they might actually work. But now I will just focus on Fox's scheme and the potential issues. Let's look at the steps listed in the website.
1. Buyers select a house and pay 20%, contributors or investors pay for the remaining 80%. The 20% instead of paying the developer, will be set aside in a trust account.
2. During the 5 year period, buyers don't have to pay any monthly mortgage repayment. Investors get guaranteed 5% per annum return funded from the money in the trust account.
3. By the 5th year, buyer need to choose whether to get a proper mortgage and buy it from the investor or sell it. Any capital appreciation up to 20% will go to developer first to compensate for their 20% effective discount initially. Anything above 20% will be shared among buyer and investor. Unfortunately, it any depreciation, buyer will bear the first 20% before it hit investor.
Questions that need to be answered
1. If the buyer can afford a 20% down payment, why can't he afford a proper mortgage? If many people complain that they couldn't accumulate enough money for 10% down payment, how does this scheme help these genuine buyers?
2. Why does developer still get to share the potential upside when the property is sold? I know they gave the 20% discount in the first place, but many projects currently are offering rebates of more than 20% and developers don't get to "recoup" the discounts given
3. At the 5th year, buyer still need to face reality and get a proper property mortgage? So if the buyer still cannot afford the house, then effectively they will be evicted?
P2P lending is just another glorified rent-to-own (RTO) scheme to help developers sell properties
By now, if you haven't realised, this so called P2P scheme is just another glorified rent-to-own (RTO) scheme. Let's look at the effect on the players involved with an example. Let's assume a simple property worth RM200,000.
Proper mortgage financing
1) Buyers need to fork out RM20k as down payment to developer and get a mortage of RM180k
2) Banks will pay developer the remaining RM180k and keep the house title as security.
3) Buyer will pay roughly RM800-900 per month based on 30-35 years repayment period
4) The capital appreciation or depreciation will be borne by the buyer and the buyer gets to choose whether to sell the property
RTO scheme (based on Maybank HouzKey concept)
1) Banks will pay developer RM200k and own the house
2) Buyers don't need to pay any down payment but pay a rental, which is slighly higher than mortgage (roughly RM900-1,100) as no down payment was made
3) Buyers can switch to a proper mortgage halfway (with the previous rental paid taken into account)
4) Buyers do not yet own the house so do not share the capital appreciation or depreciation but can choose to rent up till 30 years
P2P (based on Fund My Home)
1) Buyers will pay RM40k to developer which be put in a trust account
2) Investors will pay developer RM160k
3) Investors will get guaranteed 5% per annum return on RM160k (RM160k x 5%=RM8k per year for 5 years, funded by the trust account)
4) By 5th year, buyers have to switch to a proper mortgage and buy over the investors' portion of RM160k at market rate, failure to do so means the property will be sold.
If the property is worth RM250k, or a 25% appreciation, developer will get the first bite of RM40k. So effectively developer recoup the discount given in the first place and manage to sell the property for RM160k (1st year)+RM40k (5th year). Investors will get the RM160k (capital)+RM8k (capital appreciation 80% x RM250k-RM200k-RM40k)+RM40k (guaranteed return for 5 years). Buyer will get RM40k (capital) +RM2k (20% x RM250k-Rm200k-RM40k)
If the property is worth RM200k only, or zero appreciation, developer still get to sell the property in the 1st year for RM160k, investor will get RM160k (capital)+zero capital appreciation+RM40k (guaranteed return for 5 years). Buyers will get RM40k (capital) +zero capital appreciation
If the property is only RM180k, or 10% depreciation, developer still get to sell the property in the 1st year for RM160k, investor will get RM160k (capital)+zero capital appreciation+RM40k (guaranteed return for 5 years). Buyers will get RM40k (capital) - RM20k capital depreciation
Who's the real winner in such scheme?
Basically, compared to RTO scheme, this P2P scheme allows you to participate in the potential capital appreciation of the property but at the cost of forking out the first 20% (which many don't have). During the interim 5 years, you get to save the monthly rental or mortgage repayment (no monthly cash outflow) but at the 5th year, you have to face the moment of truth. You either have to qualify for a proper mortgage loan or sell the house which I hope the example above has already demonstrated the risk.
The real clear winner here is property developers and agents/portals that sell properties. Regardless of which way it is funded, developers clear their inventory and pocket the proceeds while property agents/portals pocket the commission or transaction fees. In the process, whether they have sold you a house that you cannot afford with money that you do not have, that's not their problem.
While on paper developers are giving a 20% discount to fund the investors' return, if you ask around, many property projects are now offering rebates of easily up to 20%, some even as high as 40%! For these developers, this P2P scheme not only allows them to get back 80% of the property value (by giving 20% discount), it also has a clause that allow them to enjoy any capital appreciation up to 20% by the 5th year. It is almost a no-brainer to them.
Investors may also be a winner here with guaranteed 5% per annum return with shared potential capital appreciation. As long as the property does not depreciate beyond 20%, it would not affect your principal plus return. Taking into account the annual return, the property also potentially have to depreciate up to 40% before it really hits your capital.
The clear loser is still the buyer. Not only you have to come up with the 20% upfront amount, you have to forgo the first 20% capital appreciation to the developer. Any any depreciation will hit you first up to 20% before it hits investors while developer have zero downside.
Irresponsible scheme attracting irresponsible buyer, potentially causing further pain in the future
If you read the article above, you will know that it is already showing signs that it is attracting the wrong crowd. I will extract some of the paragraphs below.
"But now lyliasani can tell his friends that he owns a home in Semenyih under FundMyHome after having started working for just one year. “My parents helped me with the 20% payment to purchase the home in Semenyih, which is near their home now. I’m not immediately sure if I will be staying in the new house but that is a place that I can call my own,” he said."
So now buying property is a bragging rights to your friend? If you can't afford a house when you just started working, why not try saving up for it? In the end, you are relying on your parents to pay the initial 20% you don’t have and you are not even sure you want to stay there. So this is just all for investment? With money that you don’t have, that sounds more like speculation.
Another homebuyer under FundMyHome is Abdul Fattah Ahmad, who also shared the joy of owning his first home. The 29-year-old who has been working as an executive in the financial sector for three years has little discretionary income to afford a mortgage. “However, my wages have remained stagnant in the past three years while the cost of living and house prices have both gone up. And even if I have saved up enough money to pay the downpayment, it is very difficult for me to repay the loan,” he said. “This is an attractive proposal and when I first heard about it, I was stunned because there is no need for mortgages! This scheme is certainly not conventional and I’m very excited to finally own my dream home with the 20% payment that my family assisted me with,” he said.
Why little discretionary income and why have wages remained stagnant, I’m afraid only you can answer them yourself. But it’s clear that you are not yet ready financially to own a house. So now again another example of relying on family assistance and attracted by the concept of no monthly payments, yet wanting to own a house and hope it will appreciate. Hoping for freebies in life? Again sounds more like speculation.
From these examples above, you can see that these buyers have no biz in owning a house, at least not yet. They just started working, yet to save enough money, so why tempt them into buying a house that they can’t afford? If they are financially not ready and yet bought a house with a get rich quick mentality, chances are 5 years down the road , they still may not be able to afford that house. Then guess what, all these properties will come back and flood the market and worsen the current property glut.
Some may say “Property prices always appreciate”. My answer is why don’t you ask those who bought a house in the past 2-3 years. And what if property price do not appreciate enough or worse still, depreciate? Are the buyers even aware of the risks involved?
Why do property developers and portals have to prey on these financially vulnerable buyers?
P2P lending is not the answer
Property developers need to wake up and slow down their developments and stop building houses that general public cannot afford. Meanwhile, government need to upgrade the workforce’s skillset and wages so that the purchasing power increase over time.
P2P is not the answer. It is merely an individual or company’s selfish intentions and biz plans which somehow creeps into our national budget. Stop targeting the financially vulnerable segment and try to portray yourself as one with noble intentions. As for the insider info, I don’t suppose anything can be done. SC has not even launched the P2P framework for such scheme yet somebody already came up all ready for that. I guess even SC has to retrospectively recognise this scheme after such framework is issued. All potentially because someone has some powerful friends in government.
The Pakatan government may not derive any benefit from such scheme but by doing so, they are still showing that some corporations/individuals have undue influence over government policies and have an unfair advantage over others. This is almost UMNO-like behaviour.
We voted for a government that should be better than that.
Disclaimer: The writer does not refer to any specific individual(s). Opinions written here are merely of the writer's and shall not be mistaken as hard facts. All connections drawn by the readers are of their own and the writer shall not be responsible for them
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