Press Statement by Agora Society on 11 November 2018 in Kuala Lumpur
The Agora Society has been closely following
the Pakatan Harapan government’s commitment to provide affordable housing
options to all, and is deeply concerned about the recently announced,
government-backed P2P financing scheme ‘FundMyHome’
(described in the Budget 2019 speech as a ‘property crowdfunding’ platform). We
feel that this scheme was rolled out too hastily and falls remarkably short of
its purported priority of providing secure and stable long-term homeownership
to aspiring first-time homeowners. While the prospect of moving into a, say,
RM250,000 house – for five years – instantly with only a downpayment of
RM50,000 (or 20%) might seem alluring at first glance, we are fearful that
first time homeowners may be obscured from the scheme’s long-term implications.
For a start, buyers do not have full ownership
of the property, and their rights as owner are only fully realized once they
have fully paid for the property after the initial five-year period. According
to our calculations, first-time homeowners intending to stay in the property
for more than five years will be financially worse-off by the end of Year
5 (Figure 1). Row (f) of Table 1 and Figure 1 show that if the annual home
value appreciation rate is 5% per annum, buyers would end up with an additional
debt of RM37,911 relative to a scenario where they utilised a standard mortgage[1].
This additional debt figure rises to a staggering RM104,757, relative to a
standard mortgage, if the annual home value appreciation rate is 10% per annum.
This shows unequivocally that the price of refinancing – necessary to keep the
house beyond the initial five-year period – is much higher than that of a
standard mortgaged property. Buyers will need their household income to
increase by at least 5.81%, or 1.19% in compound annual growth rate (CAGR),
during the 5 years just to keep pace with the burgeoning home value. If a first
time homeowner is not able to afford a standard mortgage for said property at
the beginning, it is highly unlikely he or she will be able to afford a
significantly higher refinancing cost five years later (see Rows (f) and (g) of
Table 1).
Few lower middle-income households are likely
to have a reserve outlay at the scale of RM50,000 to pay upfront as investment
fund, assuming a RM250k property price. Should buyers raise funds through
personal loans[2] to
pay the initial 20% (RM50,000), their monthly repayment will be roughly
RM1,125, which is just RM172 less than that which is required from a standard
mortgage repayment scheme (Figure 2). By the end of the stipulated fifth year,
buyers would have already paid RM67,000 for the personal loan and should buyers
chose to ‘sell’ the property – assuming a 10% annual appreciation rate – FundMyHome claims that they will make
total gross gains of RM76,776 (inclusive of the RM20,526 in capital gains and
RM56,250 rental opportunity gains). If the buyer were to stay during the first five
years, however, these rental opportunity gains would not materialize. By
subtracting the cost of the personal loan from a buyer’s capital gain, he or
she would be left with a paltry net gain of RM3,026 after five years of this
scheme (assuming home value appreciation of 10% annually) (Figure 3).
Cumulatively, the cost of a standard mortgage is undeniably higher in this case
(as Row (i) indicates, an additional RM10,295 after 5 years), but the mortgage
offers ownership of longer than five years, and the buyers may potentially
retain all the property’s future capital gains. In this sense, the majority of the benefits of the FundMyHome program accrue only if a ‘buyer’ is seeking a short-term
(five-year) rental agreement, and not if they are seeking to become a
first-time homeowner. The enormous contradicting factor here, though, is that
the FundMyHome scheme is itself
marketed as one which assists consumers in becoming homeowners.
Also, there is no guarantee of an average
annual home appreciation of 10% over five years; FundMyHome has stated themselves that the
price of any property may go up or
down. If the price of a property goes down, the buyer stands to lose some or
all of his capital.[3] The potential earnings that the FundMyHome has been promoting arguably
rests on an overly optimistic view of a healthy economic and housing boom – one
which nobody can confidently predict that will even come to fruition. Even if
this was the case, wouldn’t it be better for a prospective homeowner to go for
standard mortgage which can gain about a 38% (or RM72,087) return on investment
(ROI) in addition (see Rows (m) and (n) of Table 1)? Furthermore, the scheme’s
small print indicates that the investor will always receive a preferential
share of the capital gain (equivalent to 20% of purchase price) if the property
value increases, while the remaining capital gain would only subsequently be
split proportionately (20% to the buyer, 80% to the investor) after the sale in
the fifth year. In short, buyers require a property’s value to rise by 20% in
order for them to make any financial gains in additional to their initial 20%
upfront payment. If the housing market experiences a downward slump of at least
20%, the buyer stands to lose every ringgit of his or her ‘investment’. This
makes us question strongly whether the whole purpose of this FundMyHome scheme is really to ease the
burden of first time homeowners, or whether it is just another form of
investment scheme?
There are some other questions which need to be
raised before the scheme is fully implemented. What if a large majority of
Malaysian participants are unable to afford the house after five years and are
forced to vacate the premises? Wouldn’t such practices shock and crash the
housing market due to the scheme’s creation of cyclically large surpluses of
vacated properties? Would this lead to a creation of housing bubble which
renders the task of first-time homeownership far more difficult and financially
taxing?
Secondly, has the public been informed about
the higher cost of refinancing a property under FundMyHome after five years as opposed to a standard mortgage loan?
First time homeowners need to be able to at least compare and contrast the
differences between standard mortgage loans and FundMyHome in order to make an informed and responsible investment
decision.
We are of the view that the Government should
be wary of this new housing scheme, as analysis and calculation shows that it
does not benefit first time homeowners in any
sense but rather resembles an inferior investment scheme that hedges on future
property values. It is a responsibility of the Government to ensure housing
affordability to the Rakyat through truly beneficial schemes and initiatives,
instead of just helping developers solve their property overhang issues – which
exist only because of developers’ stubborn unwillingness to adjust their
inflated property prices downwards. In the end, the claim that this scheme is
to the benefit of the Rakyat is a gross exaggeration – it is the developers and
vaguely-defined ‘institutional investors’ that will benefit from FundMyHome. The scheme is bad news for
Malaysians.
[1] Current market standard home loan interest rate at 4.7% p.a. for
RM250k, assume no downpayment required, loan period is 30
years; monthly repayment is RM1,297 Reference:
imoney.my
[2] Current market standard personal loan interest rate at 7% p.a for RM50k, loan period is 5 years; monthly
repayment is RM1,125. Reference:
imoney.my
Table
1: Scenario comparisons and
calculation between FundMyHome
property crowdfunding and standard mortgage
Figure
1: Remaining debt value after
5 years (if the houseowner opts to keep the house)
Figure 1:
Figure 2: Monthly repayment for servicing personal loan
or standard home loan
Figure 3: Capital gain after 5 years (assuming 5% or 10% p.a. growth house value
appreciation)
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