Housing: Mass residential segment less affected by higher mortgages

KUALA LUMPUR: The move by some banks to raise mortgage rates for new applications since this week would not have an adverse impact on the mass residential segment, according to HwangDBS Vickers Research.

It said on Wednesday, Nov 4 the mass residential segment will be less affected as those who need to buy properties would still do so.

"In the long-run, demand should be supported by improving economic outlook, rising income levels, inflationary fears (property is a good hedge against inflation), and a young population (50% below 21 years of age)," it said.

HwangDBS Vickers Research said property stocks had consolidated by 15%-20% from recent peaks - current
valuations are undemanding at near mid-cycle levels. Its top picks remain SP Setia, DNP and E&O.

The research house said it came to understand that some banks had started to raise mortgage rates for new applications since this week. Mortgage rates have been standardised to BLR-1.8% from BLR-2.3%, while banks are no longer funding upfront costs (for example legal fees, moving costs).

"Our channel checks indicate that this directive affects only the secondary market for now. Banks are still offering attractive financing packages for new launches.

"Despite the minimal 6% increase in monthly installment payments (cashflow impact 11% of property value if include upfront legal fees), this could dent sentiment that had been affected by the recent reintroduction of real property gains tax," it added.

However, it expected transaction velocity to decelerate in the short-term (secondary market constituted about 78% of 2008 sales).

HwangDBS Vickers Research said it remains to be seen whether this agreement will be upheld and for how long, as the banking system is still flush with liquidity (loan-deposit ratio: 75%).

It also did not expect interest rates to remain at record low levels forever, adding that expectations were for the OPR to rise 25 basis points in 3Q10 and 25 basis points in 4Q10).

The banks had a similar agreement to raise hire purchase rates last year - the first attempt failed, but banks later agreed on the pricing rationale and rates are now 150 to 200 basis points higher year-on-year and are stable.

"We believe developers will continue to offer, if not step up, their incentive packages to stimulate demand. This might affect margins unless they are passed on via higher selling prices.

"A new EPF withdrawal scheme that will allow members to tap into future savings in Account 2 (on top of current savings) for property purchase will be announced in January 2010 (according to the 2010 Budget proposals)," it added.

By The EDGE Malaysia (by Joseph Chin)