August 18, 2011

Affordable houses schemes in Malaysia are not going the USA way (yet)


A friend on Twitter, Mr. @YouTiup thinks that Malaysia is heading the USA way in our affordable houses effort due to the similarities between our program and theirs. He got the idea through an article entitled 'White Picket Fence? Not So Fast' in the New York Times. America has been subsidizing homeowners and housebuyers with a few tax breaks and subsidies. The first paragraph of the article basically states the subsidies and tax breaks that homeowners/housebuyers got : Mortgages subsidies are given through government sponsored financial institution known as Freddie Mae and Fannie Mac (read about them in this article by History News Network); Americans get federal income taxes deductions for mortgage interest payments; tax deductions from state and local property taxes; and favored treatment from capital gains from sale of primary residence.

Malaysia has just launched two programs which are similar in the veins of USA affordable housing program. We have a My First Home Scheme which covers houses (first or second hand houses) between the price of RM100,000-00 to RM220,000-00 for first-time homeowner. It is a 100% loan provided by various financial institutions which include Maybank, CIMB Bank, Affin Bank and RHB Bank, among others. It is a 100% loan as the first 10% payment to buy the property will be guaranteed by Cagamas Berhad and has a maximum tenure of 30 years. It is only open to Malaysia citizen below the age of 35 years old with household income less than RM3,000-00. This scheme is already open for application and the executors for this scheme are the banks.

The second scheme has been launched in May 2011 and it is called 1Malaysia People's Housing Scheme or better known as PR1MA. A corporation called 1Malaysia Housing Program Corporation has been established and a CEO has been appointed. As of now, only a few information can be obtained from PR1MA website. The price of the houses are between RM220,000-00 to RM300,000-00. Unlike the My First Home Scheme, the executor for this project is a new entity which act much like a housing developer. It will identify locations and build houses for people who are eligible. As for who is eligible for this scheme, they must be Malaysians who never own a house before (first time homebuyer) and has a household income of RM6,000-00. Some of the features (unconfirmed) including exemption of stamp duty, eligibility of 105% loan from selected financial institutions with the 5% to pay insurance and legal fees and a lock-in period where the housebuyers cannot sell the house within the first 10 years of ownership. An Act of Parliament will be enacted for this scheme.

Other than these two schemes, let us note a few tax treatments that homeowners in Malaysia are currently under. As for now, there is a blanket stamp duty discount of 50% for any houses bought by anyone, either first hand (from housing developer) or second hand houses below the price of RM350,000-00 which will be in effect until 31st December 2012 and a 20% discount for stamp duty for any Islamic finance instruments, including house mortgage, which for now doesn't have an expiry date. There is a real property gain tax (RPGT) of between 30% to 5% for any sale of property owned by any homeowner below 5 years. On the sixth year, the RPGT will not have to be paid (Correction : The current rate for RPGT is 5% flat rate for any profit made for property sold below five years). Is there mortgage interest deduction in Malaysia? It is only applicable for loans to improve rental property. Between 2009 and 2011, mortgage interest deduction is applicable for first home too. It is also important to note that currently, a housebuyer who is buying his third house can only get 70% mortgage from any financial institution.

Let us go back to the New York Times article and compare it to Malaysia situation. Foremost, let us look at the question whether Malaysian houseowner is guaranteed by the government in any way? Except for the 10% of the My First Home Scheme, there is no mortgage guarantee. As the financial institutions which disburse the loan are private institutions (although some are Government Linked Companies or owned by them), we don't have a Freddie Mac or Fannie Mae. As for tax-break, I don't think we get much of it except as listed above. Total exemption from stamp duty in Malaysia does exist in pockets of housing development areas through application to income tax office which are mostly given to low cost housing although there was a blanket exemption once circa 2000 and 2005.

To say that we are totally safe from a sub-prime crisis is to be totally optimistic. Home ownership is always in danger of being exploited by speculator (as any investment is). We do have a few cautionary tales and questions we should ask the government. Among them is whatever happens to the earlier government-owned affordable housing company like Syarikat Perumahan Negara Berhad which currently are building low cost housing for kampung folks and affordable housing below RM100,000-00. Financial institutions for now are very prudent and does not offer those 100% or 110% mortgages which were rampant in the early 2000s. We don't have financial institution which dishes up mortgage without you having to prove your income and get a reliable guarantor for your loans. Housing developers, especially new ones are investigated and need to pre-qualify to ensure they are reliable. Bank Negara Malaysia need to ensure they never return to their free-wheeling days of early 2000s. We hope the government is not going to flood the market with unwanted affordable houses with the PR1MA scheme. Make sure the first-time housebuyers are genuine and can afford the mortgage even to the point of regular spot-checks that they are living in the house that they bought and not turning it into a very lucrative income generator.

So, to answer Mr. @YouTiup, with prudence, we are not going down the road of the USA. Yet....


kc said...

i think rpgt is flat 5%

kruel74 said...

Sorry to say that 5% flat is wrong and you can check the information by downloading information at LHDN website here : (you need to download the guideline).

Wait for my blogpost on this

kruel74 said...

Correction : The current rate for RPGT is 5%. Got bad info from the LHDN website it seems

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