House buyers feeling the pinch from rates hike
The Star 7/5/2006 By ELAINE ANG

HOME owners with mortgages are starting to feel the pain of the three interest rate hikes announced by Bank Negara since November last year.

The central bank raised its overnight policy rate (OPR) by 30 basis points (bps) on Nov 30, 25 bps on Feb 22 and another 25 bps on April 26, resulting in an increase in most banks’ base lending rate (BLR) to 6.75% from 6%.

The November change was the first since the OPR's introduction in April 2004.

A home owner with a mortgage loan of RM300,000 payable over 20 years, will now have to pay RMRM2,281.09 a month under the new interest rate regime compared with RM2,149.29 if the BLR was 6% – an increase of RM131.80 a month.

Property developers are worried that rising interest rates would make buying a house less attractive.

Real Estate and Housing Developers' Association (Rehda) has expressed concern that the property market would be affected if the rise in lending rates continued at its current pace.

“The BLR has increased 0.75% since end 2005, there is no question that demand would be dampened as house buyers feel the pinch of the higher rates.

“The first to be hit will be those who buy property for investment as higher interest rates would eat into rental income,” president Datuk Jeffrey Ng said.

Although house buyers were now more cautious, Ng noted that there were still pockets of development, which enjoyed high demand.

“With the higher interest rates, we hope that the Government would look at other measures to stimulate demand for housing in the next budget,” Ng said.

Avery, a new house buyer, is very worried about the rise in BLR. The operations specialist with a multinational company had just purchased a double-storey house in Sungai Buloh last month.

“Besides the increase in lending rates, the prices of goods and services have also gone up resulting in an imbalance between our living expenses and salary,” he said.

“If lending rates continue to go up, I will have to cut down on my purchases of computer gadgets and eat out less often and in cheaper restaurants.”

Another new house buyer, Amy, who will be getting married soon, expects to be hit by the higher lending rates in the long term.

“Although it is not affecting us much now, lending rates are expected to increase further. We'll have to save as much as we can now,” she said.

RAM Consultancy Services Sdn Bhd managing director and chief economist Dr Yeah Kim Leng believes the increased borrowing cost would help curb highly leveraged and speculative property investment especially for medium- to high-end properties.

“Given that the increase in loan repayments is not large and unlikely to be burdensome to those whose incomes are keeping pace with price increases, first time buyers would still consider buying a house given its value as a hedge against inflation and more importantly, a place to call home and start a family,” he said.

OCBC Bank (M) Bhd head of secured lending Thoo Mee Ling concurred.

“We do not expect the recent increase in BLR to have any significant impact on first time home buyers, who generally purchase the property to live in.

“If they see interest rates going up, many would, in fact, look towards buying now rather than later,” she said.

Thoo remained confident that customers seeking to buy a new home, for example, would find something in the bank’s stable of loan packages to meet their needs and requirements.

“It is during times like this that the creativity and variety of a bank’s loan product offerings, together with its marketing efforts, come to the fore and are put to the test,” she said.

Citibank Bhd mortgage business head Goh Ching Chee reckoned the rise in interest rates would have a psychological impact on customers, thus leading them to believe that costs were increasing a lot.

“They should instead sit down and talk to their bankers to work out the numbers – they will find that the increase is minimal. Property is still a good investment,” he said.

Goh noted that the current mortgage interest rates were still not nearly as high as during the Asian financial crisis, where customers had to pay up to 13.45%.

RAM's Yeah cautioned that banks could face a rise in delinquent and non-performing loans, the quantum of which would depend on the credit quality of their loans portfolio in a rising interest rate environment.

“Consumer non-performing loans have trended up with the default rate for housing loans climbing to 9.4% as at end 2005 from 8.5% in the previous year. A further albeit gradual rise in default is expected but it is unlikely to affect banks' bottomline this year,” he said.