KUALA LUMPUR: Bank Negara Malaysia (BNM) uses the Overnight Policy Rate, or OPR, as a policy tool to control inflation or boost economic growth.

The OPR is the benchmark rate, which is the reference point for setting interest rates in the country. If the OPR is raised, it will lead to an increase in borrowing costs through higher interest rates. This may then lead to a lowering of the appetite of individuals and businesses to borrow to fund business expansion or asset acquisitions, while a reduction in OPR will result in the reverse. A significant increase in the OPR would impact the property market in two ways:

a) The increase in borrowing costs may make it harder for the borrower to continue servicing the loan and may lead to him defaulting on the loan. This in turn could lead to a rise in non-performing loans (NPLs);

b) The higher interest rates may deter investors from buying property, as the higher borrowing costs may make it a less attractive proposition, especially if rental rates and capital appreciation rates remain stagnant. This could then lead to a drop in the volume and value of property transactions.

Nevertheless, it has to be pointed out that borrowing activities are not influenced solely by changes in interest rates but will also be impacted by the state of the country's economy as well as the property market, changes in the political environment, and consumer and investor confidence.

2020: Rupture

When Covid-19 hit the country in 2020, BNM dropped the OPR four times over the course of the year to cope with the sudden halting of a moving economy. The reduction was made as early as on January 22, followed by further cuts on March 3, May 5, and July 7. Each adjustment lowered the OPR by 25 basis points, with the exception of May, where the OPR went down by 50 basis points. The OPR went from 3.00 per cent (before the first revision) to 1.75 per cent in 2020.

Based on BNM's data, residential-related NPLs stood at RM6.9 billion in December 2019, a 13.6 per cent year-on-year rise from the RM6.1 billion recorded in December 2018. This was before the Covid-19 pandemic was unleashed in 2020.

When market jitters found their way into Malaysia after the outbreak of the pandemic, it quickly led to BNM lowering the OPR to 2.75 per cent on January 22, 2020, in an effort to spur consumer spending and business activities. Although OPR reductions would usually create a better environment for credit expansion owing to cheaper credit, this textbook theory may not have transpired into reality.

Firstly, despite the reduction in OPR in January, residential NPLs actually rose from RM7.1 billion in January to RM7.2 billion in February 2020, suggesting that perhaps the more benign interest rate environment was overshadowed by the gloomy economic outlook due to the escalating infections and death rates caused by Covid-19 and the mounting pressures faced by businesses worldwide.

Secondly, although the OPR was swiftly adjusted downwards for the second time within a period of just about two months, NPLs continued to escalate to RM7.4 billion in the same month, registering a 2.78 per cent increase month-on-month compared to the 1.41% increase from January to February 2020. For the record, March 11, 2020, was incidentally the time when the World Health Organisation (WHO) declared Covid-19 as a pandemic, a worldwide event that caused immense suffering and financial loss on a global scale. The lowering of borrowing costs in this instance was not sufficient to overcome the lower consumer confidence arising from painful salary cuts, job losses, and business failures, and as such, NPLs continued to rise despite interest rates being lowered.

As time passed and with a series of stimulus and relief measures announced by the government to either boost the market (eg. 2020 Economic Stimulus Package announced on February 27) or control the spread of the disease by restricting the movements of people (e.g., Movement Control Orders effective March 18), economic pointers began to show mixed signals that were, however, not as easy to decipher.

Residential NPLs, for example, began decelerating from April to September 2020, registering RM7.2 billion to the year's lowest of RM5.8 billion, respectively. This improvement can, however, be partly attributed to the housing loan moratorium assistance announced by BNM on March 25, 2020.

In terms of loan applications, BNM's data showed that the value of loans applied came down from RM127.1 billion in the first half of 2019 to RM96.4 billion in the first half of 2020, despite the reduction in OPR during the year. As for approved housing loans for H1 2020, the amount came up to RM32.8 billion from the total of RM96.4 billion in loan applications. The 34.1 per cent approval rate was considerably lower than the average approval rate recorded for all first half-yearly data from 2014 to 2019, i.e., 44.6 per cent.

In light of the situation and the continuous calls from the industry to restore market interest, the Home Ownership Campaign (HOC) was reinstated from June 1, 2020, to May 31, 2021, before being extended again to December 2021. The HOC was initially carried out in 2019 to help the industry overcome the alarming overhang in stock in the country.

With the final OPR adjustment taking place on July 7 and holding it at 1.75 per cent from then on, the property market witnessed a resurgence of activity, with experiential virtual walkthroughs taking centre stage to plug the gap left by the restriction on physical visits to the developers' sales offices. The stifled physical environment saw online solutions thrust to the forefront, with every property developer vying for the same attention with better and more convenient digital processes to seal the deal.

As a result of the setbacks suffered in 2020 due to the pandemic and painful movement control restrictions that impacted most businesses, Malaysia's property market ended the year with 191,354 transacted properties worth RM65.8 billion. These were 8.57% lower compared to the 209,295 units and 9.15 per cent lesser than the RM72.4 billion recorded in 2019.

2021: Rumblings

As the market entered the new year with the OPR at 1.75 per cent, the value of residential loan applications went up to RM179.4 billion in the first half of 2021. The percentage of loans approved also rose to 35.3 per cent in H1 2021, or RM63.3 billion of loans approved out of RM179.4 billion of loans applied for, the highest quantum ever recorded in first half-yearly data since 2014. By performance, these were improvements of 92.6 per cent in approvals and 86 per cent in applications, respectively, compared to the preceding year.

Residential NPLs, however, persisted with a flip-flop trend month-to-month, starting with RM8 billion in January, coming down to RM7.9 billion in February, and reaching a high of RM8.7 billion in September before closing the year at RM8.1 billion in December.

In the same year, the total volume of property transactions increased by 3.9 per cent to 198,812 units, while the total value of transactions went up by a higher margin at 16.9 per cent to record RM76.9 billion compared to 2020.

Right at this juncture, these indicators would seem to suggest that the lower OPR may have incentivised new borrowers instead of existing ones, especially those overgeared or already relegated into the NPL category. The continuous measures to assist this critical class of borrowers, such as the housing loan moratoriums and possibly a varied form of proprietary assistance offered by the financial institutions, have yielded little and did not prove to be as good an antidote as had been hoped.

2022: Resurgence

If loans and property performance inched up while holding the OPR constant in 2021, 2022 surprised the market with four OPR escalations, with each rising by 25 basis points to reach 2.75 per cent on November 3, 2022.

Against this backdrop, residential loan applications surprisingly increased to RM235.7 billion in the first half of 2022, while the value of loans approved surged by 39.2 per cent to hit a record-breaking RM92.4 billion loans.

Residential NPLs nonetheless experienced another dreadful year as it worsened further from RM8.8 billion in January to RM10.2 billion in December.

As for property transactions, there was an increase of 22.3 per cent in the volume of units changing hands in 2022 compared to 2021, while the value of transactions went up by 22.6 per cent over the same period. Both the total volume and value of transactions for 2022, at 243,190 units and RM94.3 billion, respectively, outpaced all annual transactions recorded by NAPIC since 2016.

2023: Recovery?

After showing some form of inelasticity against the OPR hike, the Monetary Policy Committee (MPC) at BNM raised it once more, six months later, by 25 basis points to 3.00 per cent on May 3, 2023. This new uptick leveled the OPR back to the pre-pandemic regime but remains 25 basis points below its peak of 3.25 per cent (from January 25, 2018 to May 6, 2019). The two subsequent meetings by the MPC on July 6 and September 7 kept the OPR unchanged at 3.00 per cent as an accommodative measure to support the economy.

With the higher OPR at 3.00 per cent, the number of loan applications came down slightly in the first half of 2023, dropping from RM235.7 billion to RM222 billion in the first half of 2023. The value of residential loans approved, however, went up marginally from RM92.3 billion to RM93.9 billion.

With the normalised OPR, Malaysia's residential NPL unfortunately continued swelling, expanding from RM10.1 billion in January to RM10.4 billion in March 2023 (BNM's last available data).

Analysing NAPIC's data for 1H 2023, it is noted that the total volume of property transactions declined by 2.1 per cent to 184,140 units, while the total value of transactions increased slightly by 1.1 per cent to RM85.4 billion compared to the corresponding period in 2022. For residential property transactions, the volume of transactions declined by 1.0 per cent while the value of the transactions came down by 1.8 per cent.

On the macroeconomic landscape, NAPIC's 1H 2023 report also cited the dwindling Consumer Sentiment Index (CSI) and Business Conditions Index (BCI) tracked by the Malaysian Institute of Economic Research (MIER). According to the research house, the CSI dipped below the 100 threshold at 90.8 as of Q2 2023 due to "pessimism about future jobs, incomes, and inflation, and their spending plans also appear to be lower," while the BCI weakened to 82.4 points in Q2 2023, attributed to global uncertainties.

Will the next OPR movement impede or encourage property take up?

It remains to be seen, with many moving parts still to consider after a relatively fine run up until 2022. Factors at play include the stability of the government, the state of the country's economy, the employment rate, the individual's spending power, personal credit history, domestic market dynamics, supply chain activities, external risks, the geopolitical climate, international trade tensions, etc. It is clear that the movement of the OPR alone will not, by itself, increase or reduce the volume of property purchases or the level of NPLs, as all the other factors aforementioned will come into play in determining the overall health and direction of the property market.

But judging from this brief analysis, the normalisation of the OPR has had a negative impact on existing borrowers, although it has not closed the doors entirely to credit-worthy property buyers. The good news is that eligible buyers could still enjoy some form of HOC-like incentives, such as stamp duty exemptions for first-time house buyers for properties worth up to RM500,000, until December 31, 2025, as provided by the revised Budget 2023 tabled on February 24, 2023.

The contrasting performance between the property loan approval and the state of the NPL warrants the market to undergo a balancing act during this time. It's important, as such, for the Madani Government and the financial institutions to pay closer attention to this acute category before the NPL predicament gets out of hand. If not for keeping the house in order, it is to ensure the solid property market structure in Malaysia is not weakened unnecessarily. More so when measures like the HOC and the OPR adjustments have successfully navigated the market out of the momentary setback experienced in 2020. Article courtesy of Henry Butcher Malaysia