Malaysian home prices propped up by GST, weak ringgit and hefty compliance costs

AMID Malaysia's soft economy, property prices have moderated on reduced demand but a home remains out of reach for many people because a new consumption tax, the devalued ringgit and hefty compliance costs continue to keep prices high, developers say.

Even the collapse in global oil prices to nearly a third of the US$115 (S$162) per barrel high has offered no relief although oil inflation was previously blamed for the jump in building costs.

Prices remain sticky because of a 6 per cent goods & services tax (GST) and its "cascading effect", said Penang Rehda (Real Estate & Housing Developers' Association) chairman Jerry Chan.

Inefficient GST refunds aside, traders and suppliers are adding on the tax for fear that "claw back" payments are unsuccessful.

Customs has attributed late refunds (more than 14 working days) to the incomplete submission of forms but expects processing to be speeded up when companies are more familiar with procedures.

However, GST collections have surprised on the upside; RM39 billion (S$12.8 billion) was collected over April-October against an initial forecast of RM21 billion for the nine months from April to December, underscoring the point that regardless of whether a product is GST-exempt or not, most businesses appear to be adding on the tax.

"Tell me what has dropped in price," Mr Chan challenged.

RHB Research economist Peck Boon Soon observed that all sectors bar exporters have been hit as GST and the shrinking ringgit have fuelled inflation and spooked consumers.

In the residential segment, the demand for landed properties is holding up better than for high-rise homes.

Landed home prices have reached a plateau but costs are increasing in the high-rise segment which uses much more equipment such as lifts.

Secondary home prices have become more realistic, however.

The housing price index saw a compounded annual growth rate of about 10 per cent over 2009-2014 and KGV International Consultants (Johor) executive director Samuel Tan observed: "The slowdown is making things more sustainable after the acceleration in prices."

For the first half of the year, the residential segment dipped 2.6 per cent in transaction volume while its value was down by nearly a tenth.

For completed or about to be completed units, slack demand is prompting more rebates, discounts and other incentives such as free legal fees or stamp duties which effectively lower the property price.

The number of new launches has been reduced and more people are gravitating towards affordable housing - defined by Penang-based Mr Chan as "below RM1 million".

His company's strategy is to maintain reasonable volumes so as not to be too highly geared in a slowdown.

Although various states in Malaysia have imposed property restrictions on foreigners such as allowing them to purchase only landed property of at least RM2 million, the ringgit's steep depreciation against most other currencies has made it much cheaper for non-residents.

While the currency could dip further in 2016, it is at present significantly undervalued at about 4.30 to the US dollar and 3.06 to the Singapore dollar. Property agents say they have been receiving more enquiries from clients based in China, Singapore and Indonesia.

Based on the trend in loan approvals, RHB Research's Mr Peck sees a further moderation in property prices next year. Approvals are down by about a tenth this year, he said, after registering zero growth the year before. "I think it will be better to buy in 2017," he remarked.

Developers say even when there is demand, tighter lending rules are dampening sales with an estimated five out of 10 applications rejected. Banks have turned leery of non-performing loans in a bad economy, and especially as household debt is 88 per cent of gross domestic product.

Mr Chan believes cheaper housing is possible, but only if compliance costs are reduced.

Excluding the construction costs of RM200 per square foot, there are numerous other expenses including land costs, car parks, and the need to comply with issues such as subsidised housing.

"Because policies keep changing and requirements are added, costs keep rising. Every state and every council looks at developers as fat turkeys," he said.

This article was first published on December 24, 2015.
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