Loan-to-value cut will deter speculative buying

PETALING JAYA: The potential reduction in the loan-to-value ratio for the third and subsequent house purchases to as low as 70% will bite into property speculation activities as well as banks’ loans growth and earnings to a certain extent, analysts said.

A property analyst said a loan-to-value ratio of 70% would wipe out some speculative buying in the property market.

“It will be significant, especially for the high-end and high-rise residential property segment, as this segment typically attracts more speculators.

“Banks which traditionally have exposure to such loans will be affected if this ruling takes place,” she told StarBizWeek.

To recap, there is speculation that the loan-to-value ratio for the third and subsequent house purchases could be further reduced to as low as 70% from the assumed rate of 80%.

This followed Prime Minister Datuk Seri Najib Tun Razak’s comments on Tuesday that Bank Negara might impose a limit on financing to 80% from 90% for subsequent purchases after the second property while first-time buyers can borrow up to 90%.

The move is aimed at curbing speculative property transactions in a bid to contain escalating property prices.

An analyst with a local stockbroking firm foresees slower loans growth for residential mortgages if the loan-to-value ratio of 70% is implemented.

“This could result in more competition among banks, with some resorting to giving more discounts on base lending rates thus affecting net interest income and earnings.

“Assuming a 1% drop in residential mortgage growth, banks may suffer a less than 1% drop in net profit,” she said.

Nevertheless, she said the impact might not be very significant as the number of property speculators buying third and subsequent houses in the market was small compared with genuine buyers.

“Most banks actually have mortgages to genuine buyers in their books rather than to speculators,” she added.

The analyst said hypothetically, banks with the biggest exposure to the residential property sector would be the most affected by a lower loan-to-value ratio.

According to statistics, Alliance Financial Group Bhd has the highest exposure to the residential mortgage segment, representing 39.4% of its loan book. This is followed by Hong Leong Bank Bhd with 38.7% and Public Bank Bhd 27.9%.

The analyst, however, stressed that the quantum of effect would depend on how much of the residential loans was given out to speculators as opposed to genuine house buyers.

“Then again, most banks tend to be pretty prudent and may already have a stringent credit policy in place when it comes to lending to borrowers who are not buying residential property for their own stay.

“If this is the case, then the loan-to-ratio of 70% would not have an impact on them,” she said.

By The Star