How cool is too cool? The impacts of cooling measures on Kuala Lumpur’s residential market

November 24, 2015 / By

In the recent Malaysian 2016 Budget, tabled at end-October 2015, there was a clear absence of any property measures. Since Budget 2012, there has been a continual upward adjustment of the Real Property Gain Tax rate (refer to table below), the revision of the minimum price of residential properties that foreigners could purchase from MYR 500,000 (USD116,009) to MYR 1,000,000 (USD232,018) per unit in 2014 and the removal of the Developer Interest Bearing Scheme (DIBS1), also in 2014.

Table 1: Real Property Gain Tax Rate
Picture2_24Nov2015Note: Year refers to the tax rate applied for the number of years of ownership upon sale
Source: Malaysia Institute of Accountants, JLL Research

In addition, in 2014, Malaysia’s National Bank (BNM) mandated that the Loan-to-Value ratio for all mortgage financing was to be based on the net selling price instead of the gross price2. The combination of market cooling measures introduced in the Budget and the BNM mandate had a stabilising effect on the residential market, keeping price appreciation at a more sustainable pace compared to the price surge between 2009 and 2013, and weeding out speculators. Is the absence of any government cooling measures in this latest Budget a signal that the residential market is “cool” enough?

Since the implementation of these cooling measures, the residential sector’s performance has been soft. The Department of Valuation and Property Services reported a 6.4% decline y-o-y in the number of Kuala Lumpur residential transactions for the first half of 2015. This is a decline of 11.1% compared to the first half of 2013. The weakness in the residential market is due to uncertainty in the local economy and growing concern over supply completions. Several developers have since held back their launches, preferring to wait for a clearer direction on the market movement, also adding that the government policies have negatively affected their sales.

There has been rumour of a possible reintroduction of the DIBS, for first-time homebuyers at least. With a relatively young population, median age3 of 28.2 and a steadily growing middle class, this reintroduction of the DIBS could result in a significant lift in the Kuala Lumpur residential market, especially in terms ofincreasing the number of transactions and boosting developer sales.

However, there is also a concern that first-time homebuyers could potentially overstretch themselves. House prices are relatively high, Kuala Lumpur median all-house prices are 5.4 times the annual median household income. This, combined with the rising household debt4 burden could leave financial institutions vulnerable, especially with projections of a weaker economy going forward. With that said, these recent cooling measures have helped to maintain a more sustainable property market so far. The government, in my opinion, is thus unlikely to change its policies in the short term.

USD 1.00 = MYR 4.31
1 DIBS – A scheme where a property developer absorbs the home loan interest of homebuyers during the construction period of the property.
2 Gross price – The price of property in the Sales and Purchase Agreement before any discounts or rebates are given.
3 Malaysia’s 2015 median age based on CENSUS projections.
4 Household debt refers to residential loans, credit card loans, car loans and personal loans.


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