29/07/2008 The Star News analysis by S.C. Cheah

Many are first-time purchasers already burdened with rising costs

THE gist of Bank Negara's monetary policy statement last Friday on the current high inflation and a more challenging environment in the next 12 months, while common knowledge, did however, have a slight silver lining.

The central bank's monetary policy committee decided to keep the overnight policy rate (OPR) unchanged at 3.5%.

This offers breathing space not only for business borrowers but more importantly, respite for thousands of homebuyers who are servicing housing loans. Many of them are first-time purchasers who are already burdened with rising prices for consumer goods and shrinking purchasing power.

Easy financing for nearly a decade has enabled many Malaysians to own a home and fuelled a revival of the property market. But there are now worries that the good times may end soon as people grapple with inflation (the consumer price index rose to 7.7% in June) and fears that interest rates might rise.

Of late some banks have slightly increased fixed deposit rates to 3.88% for 13 months - still less attractive than the Employees Provident Fund's 5.6% dividend last year.

Obviously, the Government is mindful of the hardship the people would have to endure as a hike in OPR would have impact the home owning public and businesses in general.

While the spectre of a more than 10% lending rates as had happened during the 1997/98 economic downturn appears unlikely, even a small hike would have far reaching repercussions, particularly on the housing and construction industries.

Confidence in the property market in general has been dented by the sudden, steep increase in petrol prices and with it an increase in the prices of most consumer goods. Many people are caught in a dilemma: to postpone their purchase of a property until matters stabilise or go ahead with their purchase, as they know that prices will not dip.

Similarly, many contractors and developers are forced to “bite the bullet” and accept an erosion in their profit margin by absorbing higher construction costs and speeding up their construction.

Delaying sale launches might hold costs awhile so that profits would not be too badly affected but the absence of new revenue could also be a strain on cash flow. “Between profit and cash flow, the latter is always more important but in such times, sales will be slower,” said a developer.

The last thing industry players want to see is an increase in interest rate that would be another blow to their bottom-line. For “borderline borrowers”, it may well lead to repossession of their properties if they cannot service their loans.

While one can argue that raising interest rates might discourage over-building and stem spending, this time round there are strong elements of a looming stagflation.

While acknowledging that risks to higher inflation and slower growth have increased over the next 12 months, Bank Negara has said its immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment.

“Given the underlying fundamental strength of the economy, and the resilient banking sector, Bank Negara's assessment is that after this transitional period, the Malaysian economy has the potential to re-establish its medium term growth path,” the monetary policy statement added.

Indeed, everyone is crossing his fingers that a plateau has been reached and things will start looking up soon.