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Mortgage cap shows results [05-01-2011]  
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The effect of a financing cap on residential properties by Bank Negara Malaysia (BNM) seems to be kicking in.

According to the November monetary statistics released by the central bank last week, loan applications to commercial banks for the purchase of residential properties have fallen about 10% month-on-month (m-o-m) to RM11.9 billion. Such loans  have hovered between RM12 billion and RM13 billion since June 2010, driven by cheap financing and ample liquidity in the banking system.

Overall, loan applications for residential mortgages fell 9.6% m-o-m.

Year-on-year (y-o-y), the November loan applications for this segment rose 2.7%, compared with October, whereby loan applications grew 12.2% y-o-y.

According to a research note by AmResearch, the lower loan application figures were due to the impact of the regulators’ new ruling to limit the loan-to-value for third properties and above to 70%.

This new ruling was implemented in November last year.

The move was a pre-emptive measure to curb excessive speculation in the local property market, following concerns of a property bubble in the region.

An analyst The Edge Financial Daily contacted concurred and said banks’ mortgage sales teams had also noticed that the loans applied for the purchase of residential properties had softened since the ruling took place.

However, he said that while there was no doubt the financing cap ruling contributed to the drop in loan applications, it could be one of many reasons why November loan applications for residential properties fell.

“If you look at the loans approved for residential mortgages figure, while it fell in November, it was a similar trend with November and December 2009. At that time, the mortgage cap financing was not announced yet,” he said.

He added that the effect of the new ruling had yet to fully kick in and hence, statistics for the coming months would provide a better indication.

Industry observers said while the excessive speculation in certain segments of the property market is a concern, the bigger worry is the large household debt that the country has.

According to BNM data, total household loans had climbed 8.4% to RM560.1 billion as at Aug 31, 2010 from RM516.6 billion in 2009.

The country’s household debt-to-GDP ratio shot up to 76% between 2004 and 2009, and is the highest in Asia ex-Japan.

A chunk of household debt consists of mortgage loans.

In recent months, research houses had noted that lending for the purchase of residential properties has been rising at a steady pace for the past three years.

Another analyst said the lower loan applications in November was a positive sign and could help address the high household debt issue, as a large household debt could present a structural problem to the country’s banking system in the long term.

“It is the rate of increase over the years that we are concerned with, and as such, the slower growth in residential property loans would be good for the banking sector.

“However, this also means that to sustain the loans growth numbers, other sectors such as the corporate segment will have to show higher growth,” he said.

He added that the corporate loans segment could increase this year, driven by project financing under the Economic Transformation Programme.

Nevertheless, he said it is unlikely that the household debt-to-GDP ratio had dropped, given that household loans had continued to expand y-o-y in November.

Maybank Investment Bank Research said household loans continued to dominate the overall loans, with property-related loans remaining stable as the largest component of total loans at 37% as at end-November, just 0.1%-points lower m-o-m.

Household loans grew 13.9% y-o-y in November compared with 13.2% in October.

AmResearch said the November loans growth was driven by the other purposes’ segment, which expanded 41.4% y-o-y, as well as residential mortgage and non-residential mortgage (21.7% y-o-y) segments.

Meanwhile, AmResearch also noted that the overall loans growth of 13.2% y-o-y in November 2010 surpassed the previous high of 12.9% y-o-y in December 2008. “The peak before this was April 1998’s +14.9% - thus industry loans growth is now at the highest level since the 1997-1998 Asian financial crisis.”

AmResearch said while 2010 loans growth is expected to be at 10.6%, the loans growth would fall to 8.4% in 2011, partially due to the high base in 2010.

Maybank IB said year-to-date, loans growth reached 11.9%, just a tad below its 12% forecast for full-year 2010, with a month to spare. However, net non-performing loans were also marginally better at 2.03%, down one basis point m-o-m. Banks’ total loan-loss coverage was also marginally weaker at 97.5%.

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