Regulations stifling industry

21/02/2006 NST

THE ongoing build-then-sell (BTS) and sell-then-build (STB) debate on housing has missed the point.

BTS or STB is not the issue. House buyers must understand that the BTS system is not a feasible solution since it is not widely practised anywhere in the world.

It is mostly STB in one form or another, be it the current system practised in Malaysia or the 10:90 Australian system. Property developers, on the other hand, must realise that maintaining status quo is a lose-lose situation for both property developers and house buyers.

The housing industry is heavily regulated and one can expect this to get worse in the coming years. The property industry today is highly inefficient because of the various regulations. For instance, a project’s time-to-market is unnecessarily protracted because property developers need to comply with various regulations.

The housing industry is regulated in order to protect house buyers’ interests. But despite all these regulations, many house buyers still end up being short-changed by errant developers.

Consequently, what we have are numerous ineffective regulations stifling the housing industry, rendering it inefficient.

The crux of the problem lies with the developers’ use of progress payments to finance a housing project.

Many of these regulations are designed to ensure that house buyers do not get fleeced by dishonest developers as it is the buyers’ money that is at risk when building a house. Thus, if progress payments can no longer be used as the mode of financing, many stifling regulations can be lifted.

As it stands, the entire property sector is made to comply with various costly regulatory requirements because of these bad apples, who should not be in business in the first place.

The existing system of using progress payments to develop a project comes with huge compliance costs, which in turn handicaps the entire housing industry, rendering it inefficient.

BTS is not the solution either. Developers must be allowed to continue to pre-sell. The only difference is that developers cannot use the house buyers’ funds to finance their projects.

The "payment guaranteed on satisfactory completion" system can be utilised for buyers that require financing: At the time of purchase, the house buyer is required to enter into an irrevocable sale and purchase agreement with the developer, place a non-refundable deposit for the property with the stakeholder and sign a binding loan agreement with the financier.

This is to ensure that the buyer is genuine and can complete the transaction as he/she already has the necessary financing in place.

Once the property is completed in accordance with the sale and purchase agreement, the entire purchase amount (excluding retention sum) will be released to the developer by the stakeholder and financier.

Cash purchasers will be required to place perhaps a 25-30 per cent forfeitable deposit with the stakeholder to ensure that it is adequately costly for them to default on their sale and purchase agreement obligations.

House buyers will no longer be duped by rogue developers as no payment is made until the house is completed.

Genuine property developers will be unshackled from the various regulations imposed on them as house buyers’ money is no longer at risk in the hands of housing developers.

I think this is indeed a win-win situation for all. House buyers and developers should work together to lobby the Government to stop the use of progress payments for property development and accordingly change the regulations designed to protect house buyers.

J.K. Kuala Lumpur