Financial institutions and the banking sector have engaged directly in the expansion of the real estate market through mortgage financing. Many studies have examined the relationship between the real estate market and the banking sector (see Davis & Zhu, 2004; Gan, 2003; Kaminsky & Reinhart, 1999). According to Davis and Zhu (2004), the sensitivity of bank credit to the value of property assets caused a cyclical movement in property prices, followed by a bubble bursting. Gan (2003) studied the decreased collateral value of land in Japan and confirmed the impact of a reduction in collateral values is the reduced in investment.
In Malaysia, mortgage market is monopolized by commercial banks and financial institutions. This market consists of primary and secondary mortgage markets. In the primary mortgage market, home loan financing is provided by the commercial banks and finance companies. The eight primary lenders include Bank Rakyat, Bank Simpanan Nasional, Finance companies, Borneo Housing Mortgage Finance, Treasury Housing Loan Department (THLD), Malaysian Building Society Berhad (MBSB) and Sabah Credit Corporation (Annual Report of Bank Negara Malaysia, 2007).
In 1987, a Malaysian secondary mortgage market institution was formed with the establishment of CAGAMAS Berhad (National Housing Corporation) (Chiquier, 2006). The objectives of CAGAMAS are to act as intermediary between primary lenders and investors and to issue secondary mortgage securities (Chiquier, 2006). CAGAMAS is also used to resolve a shortage of housing loans in Malaysia (Kokularupan, 2005). The shareholders of CAGAMAS Berhad consist of Bank Negara Malaysia which holds 20% of the shares, while the other 80% of the shares are held by the private financial sector (Chiquier, 2006). CAGAMAS offers four types of housing loans to their customers including fixed mortgage purchase, floating rate mortgage purchase, convertible rate mortgage and Islamic financing debt (Kokularupan, 2005).
With the existence of CAGAMAS Berhad, the mortgage lenders such as banks and financial institutions in Malaysia are able to sell their house mortgages to other investors or CAGAMAS for an additional liquidity or hedge against the risks of interest rate volatility (Kukularupan, 2005). CAGAMAS only manages the interest and prepayment risk of the loan it purchases, and credit risk embedded in the CAGAMAS operation is relatively small. The banks, which sell the loans, have to bear the default loans (Kokularupan, 2005).
The basic features of residential mortgages in Malaysia include floating rates, fully amortize long-term loans of twenty-five years to thirty years. Most of the financial institutions offer 80% to 90% financing for new houses (Chiquier, 2006). The remaining balance of the home loan can be withdrawn up to 30 % of the homebuyer’s money from Account II in their EPF account1. The new amendment in the EPF funds took place in 1994 as one of new initiatives in revitalizing the housing market in Malaysia.
Most financial institutions and primary lenders in Malaysia offer two types of mortgage loan: conventional housing loans and Islamic housing loans (Muhamad, 2002). In the conventional mortgage loans, the interest rates can be fixed or variable (Muhamad, 2002). For the Islamic mortgage loans, the interest rates are calculated based on the cost-plus margin basis with a fixed loan instalment paid for the whole term of the loan’s duration (Muhamad, 2002).
The mortgage market in Malaysia boomed from 1990 to the middle of 1997 before a meltdown occurred in 1997/1998 due to the Asian financial crisis. According to Bank Negara Statistics, bank loans to the property and construction sector by commercial banks and finance companies increased from RM32 billion in 1990 to RM127.6 billion in 2000(see Figure 2.6) (Mohd Isa, 2004).
At the peak of the Asian financial crisis (1997/1998), residential mortgage consist of only 12% of the total banking system’s outstanding loans (RAM, 2007). Since 30th June, 2007, the Malaysian mortgage market has been in a recovery phase and the
1
The EPF (Employees Provident Funds ) was set up in 1955 with the aim of raising a monthly contribution from employees and employer for a retirement fund (www.kwsp.gov.my)
residential property mortgage loans amount to RM167.54 million or approximately 52.75% of the total consumer credit loans (RAM, 2007). This market forms the biggest group of all consumer loans and 80% of these domestic mortgages come from the banks (RAM, 2007). Figure 2.6 shows the increase in housing loans approved by the financial institutions in Malaysia from 1987 to 2002.
Figure 2.6 Total Housing Loans approved by financial institutions in Malaysia (1987-2002)
Source: BNM Annual Reports and monthly statistical bulletin various years
As shown in Figure 2.6, the housing loans granted by financial institutions in Malaysia have increase every year since 1987 except for the 1997 Asian financial crisis, where a sharp decrease was recorded. In September 1998, the amount of loans channeled into the housing sectors was recorded at RM9 million, a significant drop from the highest peak of RM20 million in 1997 (Bank Negara Malaysia, report, 2000).
In 2004, the price of the floating rate which is based on the base lending rate (BLR) was capped at a maximum spread of 2.5% above BLR (RAM, 2007). Because of this new financial innovation, banks are now competitive in offering different types of mortgage rates to attract customers. For example, a mortgage financing offer on a fixed rate basis for the first few years before reverting to a floating rate.
The base lending rate for mortgages in Malaysia before the Asian financial crisis was 6.83% (in 1994) which was amongst the lowest rate in Asia after Singapore (5.34% in 1993) and Hong Kong (6.5%). However, the lending rates increased during the crisis period reaching 12.27% in 1998 and then decreased to 5.98% after the crisis.