KUALA LUMPUR: House prices continued to grow more moderately in the first half of 2018 at 4%, with preliminary data for Q3 2018 suggesting a further moderation to 1.1%, Bank Negara said.

It said the easing in house price growth has been reflective of weaker demand for properties in the higher-priced segments which remain unaffordable for most buyers, and subdued activity in the housing market over the last six years. 

“This is contributing to adjustments in housing supply towards more affordable segments in the past two years with an increasing share of new housing launches targeting properties priced below RM500,000,” it said in its Financial Stability and Payment Systems Report 2018 issued on Wednesday.

From January to September 2018, despite fewer launches of new housing units, higher activity in this price segment across key states supported a marginal growth in the total volume of housing transactions. 

In other states, house prices at this level are, however, still unaffordable. This contributed to the further increase in the stock of unsold housing units by 22.5% in the nine months to September 2018. 

“Despite this, a large and broad-based decline in house prices which could increase risks of a disorderly correction in the housing market is not expected for several reasons,” it said.

Bank Negara said broad house price movements are largely driven by landed residential property transactions (76% of MHPI weightage) which continue to experience firm demand.

 

 

Demand for housing is also expected to remain supported by continued income growth and formation of new households.

“Affordability remains an issue in the residential property market, while oversupply of office and retail space persists in the non-residential property market.

“Houses priced above RM250,000 continued to form the bulk of new launches and total unsold housing units, adding to the housing supply and demand mismatch in some locations. 

“With firm demand for affordable homes continuing to outstrip new supply in the foreseeable future, coupled with measures to improve financing affordability, the outlook for the housing market is expected to gradually improve along with greater alignment between demand and supply conditions,” it said.

Bank Negara said in the non-residential property segment, market activity was subdued in the first nine months of 2018.

The commercial segment, which comprises shops, as well as office space and shopping complexes (OSSC), recorded higher transaction volumes and values, in particular for properties priced above RM500,000.

Higher transactions in the industrial segment were driven mainly by properties priced RM1mil and above.

“Notwithstanding the uptick in market activity in the commercial segment, the large incoming supply of new and planned office space in the Klang Valley and retail space nationwide is expected to exacerbate existing oversupply,” it said. 

This was despite the moderation observed in the loan approval rate for the construction of OSSC to 73.1% (2017: 79.7%). 

“There remains a risk that these additional commercial spaces would remain unabsorbed, given the continued deterioration in vacancy rates even at current levels of supply, and potential headwinds to the domestic economy,” it said. 

Bank Negara pointed out that with the average rental rate of office space in the Klang Valley remaining depressed, risks of property prices adjusting sharply lower remain elevated. 

It also highlighted that building owners continued to offer generous incentives to increase tenant demand, including rent holidays and discounts to asking rents. 

“Such inducements will likely further depress effective rental rates,” it said. 

 

 

 Financial institutions' exposure

Bank Negara said in 2018, total financial institutions’ exposure to the domestic property market (RM901.30bil), grew at a slower rate of 5.9% (2017: 7.1%), in line with reducing housing affordability and elevated risks associated with the oversupply in the non-residential property market.

End-financing for residential properties remained the largest contributor to growth. Consistent with lower affordability, loan applications continued to be largely concentrated in loans for houses priced below RM500,000. 

First-time house buyers continued to account for the bulk (69%) of total residential property loan borrowers. Speculative activities also remained subdued.

“Despite higher level of unsold properties, eligible first-time home buyers continued to have access to house financing.

“Overall loan approval rates have trended slightly lower at 71.3%. Based on a survey conducted by the central bank, the primary reason for loan rejections was due to applicants being already too indebted or having insufficient income to meet scheduled loan repayments, even without considering the prospect of a future increase in interest rates,” it said.

The growth of bank financing to the non-residential property segment was stable at 2% in 2018, driven largely by end-financing to purchase shops. 

While end-financing for the purchase of OSSC continued to grow, banks remained largely cautious in lending to this segment. 

Similar to loans for the construction of OSSC, lower loan approval rates were also observed for the purchase of OSSC at 66.7% (2017: 76.8%).

Risks from property sector remain contained, with lending quality intact, it said.

Overall, the quality of banks’ loans for the purchase of residential and non-residential properties remained sound, supported by prudent underwriting and valuation practices. On aggregate, impairment and delinquency ratios for such loans remained low and vintage default rates have continued to improve in recent years. 

In line with enhanced credit risk management standards, more robust assessments by banks on the viability of property development projects have been observed. These include greater consideration of location-specific factors such as the impact of new developments on properties in the surrounding area in credit assessments.

“Amid softer market conditions, the earnings performance of property developers has been under pressure from margin compressions and ongoing efforts to clear existing inventories. For the year, property developers continued to record lacklustre performance,” it said. 

Bank Negara said while the liquidity position of firms in the sector, as measured by the median cash-to-short-term debt ratio (CASTD), has been low at below one time (0.7 times) since 2016, the debt servicing capacity, as measured by the median interest coverage ratio (ICR), remained healthy at four times, which is comfortably above the prudent threshold of two times.

“Risks to financial stability from developments in the property market remain contained. An orderly transition to a more sustainable housing market is a welcome development to reduce longer-term risks from high household debt and sharp housing market corrections.

“Banks’ exposures to property developers with larger stocks of unsold housing units are estimated to be less than 2% of total credit exposures of banks,” it said.    

Bank Negara also pointed out exposures of banks to the OSSC segments remain small, accounting for 3.4% and 6.5% of banks’ total outstanding loans and holdings of corporate bonds and sukuk, respectively. 

Bank Negara’s sensitivity analysis also indicates that banks’ capital buffers continue to be sufficient to withstand a broad price correction (50% decline in property prices) in the domestic property market, including its potential spillovers to other economic sectors. 

Financial stability risks from a more generalised downward correction in house prices are further mitigated by the bulk of residential property loans being extended to owner-occupiers. 

“These borrowers have a strong incentive to maintain loan repayments in the event of financial stress or negative equity on their homes, compared to investment buyers. 

“Further, 72% of outstanding housing loans have a loan-to-value ratio of 80% and below, thus limiting potential losses to the banking system,” it said.