November 10, 2016 7:00 pm JST

Bad debts may swell under Malaysia's home-loan policy

A construction site in the southern state of Johor

A housing policy in Malaysia that lets property developers lend to homebuyers who are unable to get bank loans due to poor creditworthiness may end up doing little more than increasing bad debts.

Noh Omar, minister of urban wellbeing, housing and local government, who oversees Malaysia's housing policy, announced the contentious policy in September.

The ministry capped the interest rate on loans offered by developers at 18% per year for unsecured loans and 12% for secured loans, substantially higher than the 4-5% interest rate that banks offer on mortgages.

The policy has two goals: to help people who are unable to get bank loans buy homes, and to help property developers increase home sales.

The country's housing market has been sluggish of late. According to Real Estate and Housing Developers' Association Malaysia, real estate sales tumbled 39% from a year earlier in January-June. Homebuilder UEM Sunrise has halved this year's sales target from 2 billion ringgit ($470 million) to 1 billion ringgit.

The market slump is largely due to an economic slowdown and oversupply Noh, however, said the reluctance of banks to lend is the primary cause.

Reaction to the government's intervention in the housing market has been mixed. While property developers have welcomed it, cabinet members did not. Local media reported that Second Finance Minister Johari Abdul Ghani said the policy is illogical.

It has drawn criticism because it is unclear whether homebuyers will be able to repay loans from developers. Rising interest payments could increase household debt burdens. Critics say the policy does not focus on the longer term. If property developers cause more potentially sour loans to increase through aggressive lending, that could further dampen an already weak housing market.

Malaysia's economy has slowed sharply as the country struggles to escape the "middle-income trap." The key oil industry has seen earnings slump, and consumer confidence is falling due to worries about job security.

The government wants to shore up the economy by stimulating the housing market, but that is merely a quick fix.

The 2008 global financial crisis was triggered by subprime loans provided by financial institutions to low-income earners in the U.S. A housing policy that artificially pumps up the housing market in Malaysia could lead to grief there as well.

 (Nikkei)

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