Monday, September 29, 2014


In the past few months, friends and business acquaintances have asked me quite regularly regarding the Goods and Services Tax (GST) which will be implemented beginning from 01 April 2015. Their questions revolve around the [possible] negative impact on the property market. Apparently, there are concerns of escalating property prices resulting from developers passing on the burden of the GST to the consumers.

I have glanced through some articles on the GST, and what I've discovered was that it's a confusing subject. I read some parts a few times and still found them not so easy to understand. I'm not sure if that's because I'm not an accountant. I've therefore decided to attend a one-day seminar next month in my attempt to get a better idea about how this GST thing works. Surely the subject can't possibly be more difficult than Level 677 of Candy Crush Saga? I mean, I've been stuck at that forsaken level for about 2 weeks now!

Notwithstanding the above, however, I find it interesting how people react to the impending 6% tax. The question is that even if indeed developers pass on the 6% tax to the consumers, would the resulting rise in property prices cause hardship to the latter? In order to answer this question, we will need to look back at past trends in the property market. There lies the answer to the question. And here, I would limit the scope of my observation to the property market in Sabah, although I suspect the same is also true for the rest of Malaysia.

In the past 5 to 10 years, the banking industry in Malaysia had been very competitive. During this period, the market saw the gradual fall of interest rates. And even if base lending rates (BLR) have been fairly stable, banks were adopting the concept of "BLR minus" for loan applications. What happened was that hardly any bank actually adopted the actual BLR. Instead, what they did was to minus some percentages from the BLR. In the end, the actual lending rates were kept low. The banks also came up with other strategies to make the loans more affordable, such as extending the loan repayment period so that the monthly installment would be kept low.

In most cases, housing is a necessity, not a luxury, and the vast majority of people would rather buy their own house instead of renting forever. What I've noticed was that price wasn't really an issue in the end. For as long as the intended buyer could get a loan from the bank, he is likely to commit to buy his dream house. After all, if he did not buy, he would have to pay rent anyway. And if he did not buy soon, the price will go up even higher in the future! Hence it's almost silly not to buy! As a result, the last few years saw prices soaring like never before. The appreciation in prices was mostly a double-digit percentage growth; and at any rate substantially higher than the 6% that consumers are suddenly so worried about.

My view is that a bigger factor that can affect the property market is the banking policy in Malaysia. Since the banks have become stricter in giving out loans about a year ago, there was an obvious drop in the volume of transactions in the property market, though there is yet no clear evidence of declining property prices. You see, when banks become stricter in lending, lesser people would be able to afford the ever-increasing property prices; and lesser people would speculate on property market. This will in turn result in a chain reaction—sales will become slower; developers may delay launching new projects etc. 

Effective demand, which is heavily dependent on banking policy, is a bigger factor in setting the trend of property prices. The effect of the 6% arising from GST, though may cause a shift in the equilibrium, is not a significant factor; at least not as significant as that of the banking policy. If the banks suddenly become lenient again, and people can easily qualify for loans as before, a much higher rise than 6% in property prices wouldn't stop people from buying. At least that's what could be observed from past trends.

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