Overpricing for ‘cashback’ is hurting the property market

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Prices of residential units are being inflated in order to entice homebuyers with cashback offers.

Real estate players are calling on the government to take drastic steps to control the issue of house price inflation caused by those who offer cashback schemes to home buyers.

The Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS) says those who inflate prices to make cashback offers aimed at enticing homebuyers must be closely monitored by the authorities.

This issue has long been a problem in the real estate industry, PEPS president Michael Kong told Property Advisor.

“It is not difficult to correct this practice but the authority lacks the will. For a start, make it mandatory for both buyers and sellers to declare the true price of a property. If proven otherwise, impose hefty penalties,” he said.

“If banks lend based on inflated values, that in itself is a problem. In the event the loan turns into a non-performing loan, the banks may not be able to recover the amount because they have lent over and above the fair market value,” he added.

He said the authorities must be serious about imposing regulations, guidelines and policies. “Nobody is doing anything about it. We can highlight it but if the current authority has no will to rectify this problem, it will persist.”

He said Bank Negara Malaysia could impose a condition on all banks mandating a market study, which would eliminate most of the problem.

Apart from that, Kong addressed the importance of valuation and data, as they are a guide for the public on the actual value of a property. “It is vital to highlight this matter so we are not misguided by so-called ‘property gurus’ and investment clubs.”

Even when a property is put up for auction, the banks get back only a fraction of the loan extended.

“This is a simple mathematical problem. As the issue is widely covered in the news, people know the banks are aware of it, yet developers are still doing it, said Kong.

“Individual banks can make both parties (buyer and developer) declare the actual price being charged for the property. And if it can be proved it is an inflated price, they will be in trouble. But are the banks ready to do it?

If banks make loans based on inflated values, they may not be able to recover the full amount in the event of a default. (Bernama pic)

“Whether it is an actual cash rebate or on paper, it is equally bad. When actual cash in hand is returned in tens or even hundreds of thousands of ringgit, it creates a different problem.”

Kong said when a project is completed, the banks disburse the loan and the borrower gets the cash. For projects still under construction, the homebuyer will get a paper rebate (documentary transaction).

“This is a situation where one does not see the money, just a rebate or discount on a piece of paper and a lower amount is paid.”

Firdaus & Associates Property Professionals founder and managing director Firdaus Musa said in property matters, especially financing, the valuation of the property is of utmost importance as it determines its fair market value.

“Valuations depend on the transaction data available. The most reliable data would be from the Valuation and Property Services Department. Other data, such as asking prices and any other published transaction data may also be considered secondary data in determining the market value.”

He said, based on these, and for lending or financing purposes by the banks, over-lending does not come into the picture.

“However, on banks’ risk management of potential over-lending based on risk profiling of borrowers, movement in the property market and the property condition over time acts as full confirmation of market value when processing the loan,” he said.

Firdaus added that normally the banks would approach valuation firms to enquire about the value of a property, and if they were satisfied with similar indications, only then would the banks proceed with the loan and instruct a valuation report to be prepared.

“For new projects, the banks will ask the valuers about the current market value of similar projects in the vicinity, whether the prices are fair and require a marketability factor on the projects to ensure the bank’s position of not over-lending.”

Charles Tan, founder of independent blog kopiandproperty.com believes all stakeholders should take proactive action on the issue of cashback rather than allow the situation to continue as it is.

“Let’s be frank. If you are a buyer and the developer offers you a cash rebate, would you reject it or take it? This is why buyers themselves must understand that when a majority buyer of a project takes up that cash rebate, it results in the property price becoming higher than the original property price before the rebate.”

He said if the buyers are fortunate and market conditions are stable, then the property price could go higher. However, that is a risk many buyers may not be aware of when taking the cashback and spending it on other things.

Solution to overpricing and inflated loans

“We have come across cases where loan sharks will force people to take loan compression for completed projects to get RM100,000 in cash, and then the bank is left carrying the baby, so to speak.

“Criminal syndicates are cashing in on these schemes and taking advantage to scam the banks for tons of money. They are organised, they have all the credentials, they know how the system works and they are earning, scamming the banks out of billions of dollars,” warned Kong.

Loan compression is when an individual applies for several home loans simultaneously from various banks in order to purchase multiple properties at a time, so they do not count as second or third homes.

“The solution is simple but nobody wants to take action. If you are taking an inflated loan, it should be declared to the bank,” he said.

This article was written by Sharina Ahmad of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.