Is purchasing a home during the COVID-19 crisis the right decision?
Have you recently bought a new property and your loan has been approved? Well, that might just be the best thing that’s happened to you financially! Here’s why.
In a bid to try and increase the amount of money that is available in the economy, for instance, for banks to lend, governments around the world have recently introduced another round of Quantitative Easing measures due to the economic slowdown amidst COVID-19.
Similar to the Sub Prime Crisis1 that occurred during the last Global Financial Crisis (GFC) in 2008, the United States has introduced a USD 2 trillion Stimulus Package and has slashed interest rates to near zero. Malaysia has reduced the Statutory Reserve Requirement (SRR) – the amount of funds that banks need to deposit with Bank Negara, by a whopping 100 basis points2, from 3% down to 2%. This is expected to free up RM30 billion of cash which banks can utilise for lending.
Furthermore, the Overnight Policy Rate (OPR) was reduced 3 times (75 basis points) in 10 months to its current value of 2.5%. A substantial drop in the OPR3 has resulted in increased business growth and reduced bank deposits. What we are witnessing is an unprecedented policy of Quantitative Easing 4 and monetary policies that are impacting every one of us.
How do these impact the everyday consumer you may ask?
Liquidity, the amount of money available, is flushing into the market and as a result, the real value of the fiat currency5 such as the US dollar or Malaysian Ringgit that we use will be reduced significantly and people will begin to buy assets instead of currency. Seasoned investors know that we will need more currency to buy hard assets such as real estate in the near future.
These are the same measures taken during the Sub Prime Crisis that eventually lead to a property boom across many countries, including Malaysia, between 2008 to 2013 where the value of property doubled or even tripled in some cases.
But QE and managing the OPR aren’t the only tools available to the government to try and keep the economy growing. In the next 12 to 18 months, there may be four more actions taken to help boost the real estate market:
1. Abolishment or adjustment of the RPGT
Real Property Gain Tax (RPGT) is a tax that is paid on the profit when selling real property or shares. By reducing the rate or abolishing it, the government will be encouraging more people to transact their property.
2. Abolishment or adjustment of the Loan-to-Value ratio for mortgages.
The LTV rate is a ratio of the mortgage being offered as a percentage of the total value of the property. By allowing banks to lend more money for a single property, consumers will not have to come up with higher deposits and hence it will be easier for them to purchase property.
3. Possible reintroduction of DIBS
Developer Interest Bearing Scheme (DIBS) is a scheme where a property developer absorbs the home loan interest of the home buyer’s mortgage during the construction period of a property. If you buy a property that comes with this scheme, the developer will pay any home loan interest that is borne by you during construction (which is usually 36 months starting from project launch). Thereafter, you will service the loan interest as you would a normal home loan. Reintroduction of DIBS will make property more accessible for buyers as buyers will not have to pay to commit to a property purchase.
4. Relaxation on foreign purchase.
Reducing the minimum purchase price that foreigners have to pay for a property will entice foreign buyers to purchase in Malaysia.
Imagine the impact on the real estate market if several of the above measures were to be introduced. Of course this would be contingent on the COVID-19 pandemic subsiding.
You may ask, why should the government help the real estate market? The simple reason is that there are hundreds if not thousands of industries behind the real estate market, and helping one would be helping thousands.
Those who are offered loans to buy property right now are the few privileged ones. This is an investment window that should not be missed, similar to the period between 2008 and 2010.
Stay safe, stay home and stay invested.
Sub Prime Crisis – A situation starting in 2008 affecting the mortgage industry due to borrowers being approved for loans they could not afford. As a result, a significant rise in foreclosures led to the collapse of many lending institutions and hedge funds.
Basis Point – One-hundredth of one percentage point (used chiefly in expressing differences of interest rates).
OPR (Overnight Policy Rate) – An overnight interest rate set by Bank Negara Malaysia used for monetary policy direction. It is the target rate for the day-to-day liquidity operations of the BNM.
Quantitative easing (QE) – A form of extraordinary monetary policy used by central banks to quickly increase the domestic money supply and spur economic activity. It usually involves the central bank purchasing longer-term government bonds as well as other types of assets such as mortgage-backed securities (MBS).
Fiat Currency – Fiat currency is legal tender whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro and many other major world currencies. This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money.
RPGT (Real Property Gain Tax) – A tax charged on gains arising from the disposal or sale of real property or shares in a real property company (RPC). In simple terms, real property includes land or immovable property, with or without a title.
LTV (Loan-to-Value) – a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. The term is commonly used by banks and building societies to represent the ratio of the first mortgage line as a percentage of the total appraised value of a real property.