The Return of DIBS – Property Investors/Buyers Saviour?

What is DIBS?

DIBS stands for Developers Interest Bearing Scheme where a property developer absorbs the loan interest of the purchaser during the construction period of a property.

Brief history of DIBS

DIBS scheme can be traced back to around year 2009 where developers were offering to property buyers to absorb loan interest during the construction period of a property. DIBS are popular amongst developers because it is a smart marketing tool which can be used to entice potential house buyers into believing that they have found a good financing deal, without being aware that in the event of project abandonment they are liable for the loan.

In Oct 2013, the government announced that all DIBS scheme to be banned in projects preventing developers from incorporating interest rates on loans in house prices during the construction period. With the announcement, the financial institutions were prohibited to provide funds that involved DIBS. This a stop to the scheme completely.

DIBS – a Friend or Foe?

On surface DIBS are attractive as it takes away the need to service home loan interest during a property’s construction period, which frees out excess money (which would otherwise be used to service the interest) that can be utilized in many ways and it enables those without any excess money to pay for the deposit to buy the property easily. These include:

• On the other hand, an undesirable household economic situation is created when a large proportion of household income is taken up to service a housing loan. Responsible individuals are compelled to ensure that they do not default on their loans. Malaysian household debts are already among the highest in the world. All these enticements will only worsen the situation.
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• Many households may fall victim to temptation and may overstretch themselves financially and eventually get into the “camel’s back” situation, whereby in order to service the housing loans, families will drastically cut back on other expenses such as entertainment, holidays, clothing, education, etc.
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• DIBS properties are also priced much higher than non-DIBS properties as there is “no free lunch” as the saying goes. Whenever a developer says that expenses such as “interest during construction”, legal fees and/or stamp duty are absorbed by the developer, ultimately the cost of such “freebies” or “rebates” as they are called will be added back and factored to the purchase price of the property.
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  This artificially inflates property price which has a push effect wherein prices of subsequent new launches as future launches must be priced much higher than RM500,000, probably closer to RM600,000, thus making subsequent new properties more unaffordable. Property prices also have a spillover effect and can push up prices properties in surrounding locations.
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• The DIBS also encourages syndicated speculators to enter the scene. Basically through DIBS, speculators can enter the market with very small capital outlays. Here speculators approach developers to offer bulk purchases or developers offer syndicated speculators bulk sales with “seemingly attractive discounts.”
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  The words “seemingly attractive” discounts may not be attractive because in reality, the selling price is already being marked up. From this marked-up price, a discount/rebate is given by way of a credit note. This credit note is then converted and deemed to be deposit/down payment paid by the speculator buyer.
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  The chief beneficiaries of the DIBS are the developers – they can dispose off their products quickly and the banks/financial institutions – they can give out higher loans to achieve their monthly target.

The Proposal of Reintroduction of DIBS

Just last month in an article published by The Star, a property developer proposed to the government to bring back the DIBS specifically for first-time buyers only.

However bearing in mind the limitations of DIBS scheme above and the limitation of being able to identify a genuine first time home-buyer against a proxy buyer. There are many buyers out there aren’t the ‘actual’ owner of the property but by way of proxy that owns by the funder, may take advantage of the said situation.

The government on the other could have a better control of the industry through other measures such as below:

• A grant given by the government to first time homebuyers would be a better choice as this would prevent a hike in house prices.
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• They should be given a higher loan margin, such as a 100% loan because a 10% deposit is a huge amount for many middle-income earners, at least for those buying affordable properties.
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• Yet another measure that has been proven effective is the exemptions of stamp duty for first time house buyers should be considered

The key to the success of the above is the need of a mechanism to check if those applying for the exemption are actual first-time buyers.