Malaysia new tax to slow mortgages from '07 Low: Islamic Finance

[KUALA LUMPUR] Growth in Malaysia's Islamic home loans is forecast by banks to slow from the weakest pace since 2007 as a new tax damps housing demand.

Am Investment Bank Bhd. and CIMB Islamic Bank Bhd. forecast the mortgage market will cool, just as tighter capital rules make lenders more cautious on expansion. The government will introduce a 6 per cent goods and services tax in April, adding to disincentives after regulators cut the maximum tenor on residential property loans to 35 years from 45 in July 2013.

The volume of property transactions is forecast to fall by 3 per cent to 5 per cent in 2015, Loong Kok Wen, a real estate analyst at RHB Research Institute Bhd, wrote in a December report. The central bank forecasts inflation will quicken to as much as 3.5 per cent this year from 3.1 per cent in 2014, while Prime Minister Najib Razak has reduced the economic growth estimate as a slump in oil prices lowers export earnings.

"Demand for mortgages will probably slow this year because people don't want to take on liability obligations in an environment of uncertainty," Mohd. Effendi Abdullah, head of Islamic markets at Am Investment Bank, the nation's third-largest sukuk arranger, said by phone Feb 4. "GST and rising inflation will also weigh as they will reduce people's purchasing power."

Mortgages that comply with Islam's ban on interest climbed 24 per cent in 2014 to an unprecedented 76.8 billion ringgit (US$21.6 billion), central bank data show. That's down from 29.7 per cent growth in 2013 and the slowest since 2007's 9.8 per cent pace. Conventional home financing grew 10 per cent to 298.5 billion ringgit last year, less than the 10.7 per cent increase in 2013.

Home loans offered to Muslims differ from their traditional counterparts in that a bank typically buys the property on behalf of the customer and rents it back at a markup to avoid interest payments. Some of the more popular options include contracts such as Ijarah, Murabaha and Tawarruq.

Prime Minister Najib increased property gains taxes and imposed curbs on foreign ownership in October 2013 to cool the market. While household debt rose 9.9 per cent in the first six months of 2014, the slowest since 2010, as a proportion of gross domestic product it held at 86.7 per cent, according to an October Treasury report.

The government cut 2015's GDP growth estimate to a maximum 5.5 per cent in January from as much as 6 per cent. A 49 per cent slump in Brent crude prices since June is crimping revenue for Asia's only major oil exporter.

Malaysia's House Price Index fell 0.4 per cent in the three months ended September, the first quarterly decline since 2008, according to the most recent data from the finance ministry.

"Consumers are likely to become more cautious in light of the weak sentiment, softening the property market," Dzulkifly Aminuddin, head of consumer financial services at OCBC Al-Amin Bank Bhd. in Kuala Lumpur, said in a Feb. 6 e-mail. "With uncertainties on the economy and access to financing more difficult now, it's not surprising that mortgage businesses are affected." May bank Islamic Bank Bhd, a unit of Malaysia's biggest lender by assets, doesn't expect the GST to have a major impact on home loans, Chief Executive Officer Muzaffar Hisham said in an e-mail Monday. The lender will review feedback and adjust its strategy accordingly to ensure sustainable growth, he said.

While mortgage demand is slowing, the nation's Islamic banking assets more than doubled to a record 543 billion ringgit in the past five years, according to Treasury Department data from October, the most recent available.

Market Blip It's also proving to be the slowest start to a year for suck sales since 2010 in the world's biggest Sharjah-compliant debt market. Offerings total 1.8 billion ringgit so far in 2015, the least since 90 million ringgit in the same period of 2010, data compiled by Bloomberg show. Issuance was 62 billion ringgit last year and a record 95.8 billion ringgit in 2012.

The implementation of new capital-adequacy requirements for banks worldwide known as Basel III will also make lenders cautious in expanding credit, according to CIMB Islamic Bank. Lenders have until 2019 to comply with the ruling that will provide a buffer against losses following the financial crisis.

Buyers will adopt a wait-and-see attitude before the implementation of GST, said Badlisyah Abdul Ghani, chief executive officer at Kuala Lumpur-based CIMB Islamic Bank.

"This year could be a blip in the local Islamic mortgage market," Badlisyah said in a phone interview Friday. "Once economic conditions stabilize and concerns about the GST are allayed, demand for home loans is expected to pick up again next year."