The Malaysian Reserve, Photo Credit to MoneyWeek
clock 21-05-2019
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Property Crowdfunding for First-Time Homebuyers to Flood Credit Market?

Malaysia's crowdfunding scheme for first-time homebuyers could risk saturating the market with too much credit and potentially exacerbating household debt if no proper safeguard is in place. The coin has two faces. On one side, there is easier access to the credit market, but on the other side, there is the risk of a higher degree of financial instability for those whose situation is already fragile in itself.

The Securities Commission Malaysia recently released a new framework for the property crowdfunding platform which is aimed at providing an alternative financing option for Malaysians looking to purchase their first home.

Among others, the first-time homebuyer needs to be at least 21 years old and the financing limit for the property to be purchased — valued at no more than RM500,000 at the primary offering — is up to 90%.

The property crowdfunding platform will be the first of its kind in the world and is part of government-led efforts to leverage technology to provide alternative funding avenues for first-time homebuyers.

Institute for Democracy and Economic Affairs senior fellow Dr Carmelo Ferlito said the initiative is likely aimed at facilitating home purchases from lower-income households as the purchases are capped at RM500,000.

While providing an alternative to the traditional credit market, the abundance of financing options made available to homebuyers risks exacerbating household debt if financial prudence is not exercised, he said.

"The coin has two faces. On one side, there is easier access to the credit market, but on the other side, there is the risk of a higher degree of financial instability for those whose situation is already fragile in itself," he told The Malaysian Reserve.

Ferlito, who is also an adjunct faculty member at INTI International College Subang, said overly high financial exposure is negative for both households and the overall stability of the economy.

The financing limit of up to 90% of the property's value further increases the risk of financial instability among buyers, he added.

"It is therefore important to increase the level of awareness among potential buyers to ensure more responsible and balanced choices are made."

Malaysia's household debt to GDP remained high at 83% or RM1.18 trillion last year, with housing loans accounting for 53.2% or RM628 billion of the total.

The property crowdfunding scheme needs to be wary of this high debt level as it provides alternative financing for first-time homebuyers whose main grouse is the difficulty in securing housing loans.

A total of RM21.72 billion in loan applications were made for the purchases of residential properties in March this year, while only RM8.64 billion in housing loans were approved that same month.

This is likely in the best interests of banks as home loans comprised RM6.03 billion or 24.5% of the total RM24.58 billion non-performing and impaired loans recognised by the domestic banking sector that month.

The property crowdfunding scheme can thus provide an alternative route for prospective first-time homebuyers, while simultaneously addressing the persistent housing glut facing the market today.

In the second quarter of 2018, a total of 166,888 residential units were unsold nationwide, of which 61% were priced below RM500,000 — the cap for property purchases under the crowdfunding platform.

However, Ferlito warned that intervening in the market may run counter to the natural re-balancing of the supply and demand dynamics in the property market.

"In strictly economic terms, entrepreneurial losses are very important in that they work as signals — they are communicating that wrong choice were made and therefore certain initiatives are not economically convenient," he said.

"If there is no sound demand for certain products, it is good to leave those products unsold to avoid further mistakes and wrong choices."

He said the discovery of such mistakes will help entrepreneurs amend their decisions in the direction suggested by the market itself.

Sufficient knowledge on how the new property crowdfunding instrument will work is thus imperative in managing these concerns of household debt and unsold property units, Ferlito said.

"The big risk is that property crowdfunding helps speculators rather than homebuyers if we do not monitor how the plan is implemented," he said.

"In this sense, I re-stress the need of educational initiatives to create information on the risks and benefits of different options and education devoted to promoting prudence among the households."

To protect investors' interest, property crowdfunding operators are required to have a minimum shareholders' fund of RM10 million and provide exit certainty at the end of the agreed upon tenor.

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