With more businesses adding real estate into their revenue streams as well as outright diversifying their core businesses into property lately, a sense of déjà vu is washing over market observers who noted that such news is reminiscent of what happened before the Asian Financial Crisis (AFC) in the late 1990s.
Back then, there were seemingly endless rounds of new property and construction companies entering the scene, said Pong Teng Siew, Inter-Pacific Research head of research.
“It was a sure sign that the sector was overheated,” said Pong to KiniBiz.
Nearly two decades on, are we seeing the pre-Asian Financial Crisis (AFC) property rush happening again?
To that question, Pong feels the answer is yes, remarking that property and real estate seems to be “everyone’s favourite game now”.
The sentiment is shared by Terence Wong, CIMB head of research.
“It shows that the sector is hot and many are jumping in,” said Wong of CIMB. “It does give pause to analysts in terms of questioning whether there is a bit of froth in the sector.”
In the aftermath of the pre-AFC property rush, some burned their hands when the financial crisis stuck, though not all.
“The most prominent that went into property then was Mah Sing and it has actually done very well to emerge as one of the biggest and best developers around,” said Wong.
The financing echo from 1990s
Bank Negara buildingAdding to the sense of déjà vu is the observation that, in recent years, Bank Negara Malaysia (BNM) has introduced measures reverberating with similar curbs in the mid-1990s.
The pre-AFC curbs include capping loans for the property sector to 20% of outstanding loans — though only for specific types of property — as well as expanding the credit limits for stocks and shares to also cover units of unit trust funds, both of which came into effect in April 1997.
“In the recent past, the Bank has expressed concern on the strong increase in lending by financial institutions to less productive sectors,” said BNM in 1997. “Lending to the broad property sector, comprising real estate, construction and housing increased sharply by 29.9% in 1996.”
“At the same time, loans granted for the purchase of stocks and shares and units of unit trust funds, including to holding and investment companies, rose strongly by 30.5%,” said BNM in a statement then.
In October 1997, BNM again stated that financing should be directed towards “more productive sectors”.
These include productive and export-related manufacturing activities, the productive services sector, small- and medium-sized industries as well as for low and medium cost housing including end-financing for owner-occupied residential properties.
The central bank then followed up in February 1998 with a number of policy measures that include rationalising the term of interest rates at the time to reflect liquidity conditions as well as create “conditions to enable banking institutions to prioritise credit facilities to support more productive activities”.
“At that time, BNM was of the view that investment in properties is not (very) productive, so loans growth was capped,” said Pong of Inter-Pacific. “BNM limited how much loan can be given to the sector.”
But the echoes are faint
However, this time around the measures are “not so severe”, said CIMB’s Wong.
In the past few years, the central bank has limited the financing margin for the purchase of third residential property onwards to 70% as well as changing the basis of evaluation for loan eligibility from gross income to net income.
More recently, the central bank capped housing loan tenures from the previous 45 years to a maximum of 35 years.
This was followed by further cooling measures in last month’s Budget 2014 tabling — raising the real property gains tax (RPGT) rates, abolishing of the developer-interest-bearing scheme (DIBS), doubling the minimum property purchase price for foreigners to RM1 million.
The light is yellow, not red
While the familiar trends from the last major financial crisis to hit Malaysian shores are not resurfacing like-for-like, the fact remains that they are, and the emerging question is whether these developments should set alarm bells ringing.
Acknowledging some parallels between current conditions and how things were back then, Inter-Pacific’s Pong highlighted that some aspects are now different.
For one, the character of the Malaysian economy has changed — in the mid-1990s Malaysia was more reliant on manufacturing for growth with stocks and properties being seen as conduits for growth.
Another difference is that the 1990s was a period of high interest rates.
Up to August 1998, BNM’s three-month interbank rate stood at 10%, after which it was reduced to 9.5% in an announcement dated August 27, 1998. It previously touched 11% earlier that year.
In comparison, the central bank’s three-month interbank rate has remained below 4% in recent years, briefly touching a multiple-year high of 3.95% for part of 2006.
“The risk of a bubble bursting is that much higher if interest rates are high,” said Pong.
Additionally, the financial sector at present is better-equipped in terms of risk management, said Pong, noting there are even more safeguards and transparency in the financial sector today.
“Back then loans growth rate for the banks was generally 30%,” said Pong to KiniBiz as an example. “Now 30% is a rarity, it is generally a bit over 10%.”
Therefore the similarity between current conditions and what was occurring before the late 1990s financial crisis should not be taken as a doomsday sign. Nor should it be dismissed, however — there should be a bit of caution, said CIMB head of research Wong.
“But fundamentals of the residential sector remain robust so still no worries yet,” said CIMB’s Wong.
So what should the market watch out for next?
For Inter-Pacific’s Pong, the answer is the development of interest rates, especially in the broader global context, since the current low-interest rates environment brought about by the US Federal Reserve’s quantitative easing (QE) measures cannot continue as-is in the long run.
“When the QE tapering or modification begins, there will be a new backdrop for global interest rates’ environment,” said Pong.
