Limiting Home Purchases: Malaysia Boleh?

photo credit: Wbs 70

There was a piece of news in mid Sep 2011 that jittered Malaysia property market:

Malaysian government to consider limiting home purchases

I would say Malaysia government is very “ambitious”, again as usual, since it is mainly run by people who “know” (or not?) so much about economy and law..

Recently there is another rumour also in the market about raising the Real Property Gain Tax (RPGT) from 5% to 30%-40% in year 2012.

I can understand why Malaysian government is in panic to cool down the housing prices. Inflation is one of the most difficult problems they could ever handle, according to Mr. History. One of the faster ways to lower consumer price index is by bringing down the housing prices.

Although the idea of limiting home purchases and rental increase seems more viable, I would still say both this and the idea of raising property gain tax are rather stupid, if not idiotic.

But if they really can implement these ideas eventually, in Malaysia, I can only say – Malaysia Boleh!!

Why?

Not a single government in any of the developed countries in the region such as Singapore, Taiwan, Hong Kong or even China are able to do this, yet, even they are facing the same problem. Because they know better the root cause of the hyper-inflation and increasing property prices. In fact, it simply boils down to demand and supply.

Asian markets is now having more demand on real asset as a mean to hedge against out-of-control global inflation, which has been deliberately fueled by those central banks whose priority is to contain their national debt problems.

To Malaysia government, raising RPGT is a way to curb the supply, allegedly from speculative activities, while limiting home purchases is to limit the demand.

However, history teaches us that the more intervention from government in the market the worse effect it could be.

For example, since RPGT was re-imposed in year 2010, property prices went up even faster instead of going down because all short-term sellers include this additional cost into their selling price. I cannot imagine if RPGT is increased to 30%…

In fact I would think government is trying to use this method to borrow more money from people (without interest!) because they can withhold more cash from each property transaction if they implement the idea. Currently they are withholding 2% of the selling price upfront from each transaction for “tax evaluation purposes”, regardless how much RPGT the seller has to pay. And who knows when they will return the money to you if you are not subject to RPGT or part of it.

On the other hand, limiting home purchases was indeed indirectly implemented in Singapore since year 2010. However, Singapore government controls through limiting the margin of finance in approved mortgage loans instead of stopping people from owning more than one property because it is against the Constitution – the individual liberty and right of property guaranteed by the Constitution.

In Singapore, one has to sell away his first house before buying the next house in order to enjoy a maximum 80% margin of finance from bank, otherwise only 60% is allowed. They control banks’ approved margin of finance because it is viable by law.

However, statistic data shows that the effect of this measure on housing price is limited – number of transactions is growing in a slower pace but the average housing price increased! Why? Because now the game is mainly played by those who are really cash-rich!

As a consequence of that, banks in Singapore are now lowering mortgage interest rates because their businesses are affected. At this time, only Singapore can allow banks to lower the interest rate because they do not rely on interest rate but their strong currency to regulate inflation.

Malaysia government should focus on increasing the actual supply in order to meet the actual demand. This will eventually let the market force cools down the prices. Singapore, Hong Kong and China governments are speeding up to supply more housing in the next 2 years.

So, what will happen next?

Nobody can tell you what is going to happen next. However, such irresponsible announcement by Malaysia government will only make housing prices to go even higher in short term. Existing property buyers will rush to close any outstanding deals before it is too late, regardless the idea is going to materealise or not. More uncertainty in the market will only cause more volatility.

Before the next recession arrives when people start losing jobs and incomes, now I can only see one direction where Malaysia property prices will head to – up. Thanks to all the unnecessary interventions from governments.