HGS akin to guaranteeing developers’ profit

The HGS will probably result in a big increase in cases of abandoned housing projects.

THE first question the Government needs to face is why does abandonment of housing projects take place? The root cause is the lack of and lax in enfocement of existing laws.

The National House Buyers Association (HBA) is deeply concerned that the Government proposes to set up a Housing Guarantee Corporation (HGS) purportedly to protect buyers and housing developers in the event of abandonment of housing projects by developers. What is more worrying is that the loss caused by abandonment is to be incurred by the Government. The Government will hold 70% equity in the HGS while the balance is held by private funds i.e. Rehda and government-linked agencies such as the Employees Provident Fund (EPF) and Tabung Haji.

Lax and lack of enforcement

The public who rely on legislations are often let down by the enforcers. Any law is only good on paper and will continue to remain in our archives unless the existing laws or whatever revamped “for the protection of house buyers” are used to their full capacity. The problem with enforcement is not because of the lack of laws but because of the lack of or lax in enforcement. Enforcement programmes must be organised and must be implemented.

We have Section 10 of the Housing Development (Control & Licensing) Act 1966, where it is stipulated that the minister may direct the controller or an inspector to make investigation (under condition of secrecy investigate the commission of any offence under this Act or investigate into the affairs of or into the accounting or other records of any housing developer) if he “has reason to believe” that the housing developer in question is carrying on his business “in a manner detrimental to his purchaser’ or “has assets insufficient to meet his liability”. 

This section is further enhanced and amplified with the inclusion of Sect 11 (Powers of the Minister to give directions for the purpose of safeguarding the interests of purchasers) and Sect 10A (Power of entry, search and seizure) and all safeguards and safety nets under the legislation. The minister and his ministry have wide-ranging powers to intervene and salvage a “sick project” and to offer “treatment to provide cure”. 

However, just look at the number of abandoned projects which emerge as a dire financial picture for naïve and innocent buyers. Individuals and the community are being harmed by the lax in enforcement and monitoring mechanism. 

Misguided Concept

The Housing Ministry having attributed to developers’ abandoning of housing projects, now takes it upon itself to rehabilitate the abandoned housing projects, all at the taxpayers’ expense. The Housing Ministry’s Housing Guarantee Scheme (HGS) simply means that the matter is taken to another level in making the Government go further in ‘teaming-up’ with developers.

This is clearly a case where the Government has been ill advised or, to put it plainly, misled by business groups with vested interests on how to tackle the problems of abandoned housing projects which they caused themselves without any expense to themselves. The saying that “the road to Hell is paved with good intentions” certainly holds true for the proposed Housing Guarantee Corporation (HGC). It will not solve the problem of abandoned housing projects but will increase them exponentially. HGS will also not solve issues that relate to shoddy workmanship, sub-standard materials, timely delivery and a host of other problems which one has to encounter with errant and wayward developers.

The setting up of the HGC will be seen as a “licence” for developers to recklessly launch new housing projects in huge volumes regardless of its viability. The most-talked about case is where a developer launched over 9,000 housing units simultaneously a few years ago as the norm. Going forward, developers know that they can abandon the projects should things turn bad for whatever reason and the HGC will take over the project and “mop up” the consequences of abandonment. It will be a clear example of “Profits Privatised – Losses Nationalised”.

Gambling house buyers’ monies

Housing Developers will be encouraged to gamble with house buyers’ monies through the progress billings under the current sell-then-build system only to abandon the project at the earliest sign of trouble. This will result in a big increase in cases of abandoned housing projects throughout the country and will pose a huge strain on the HGC and, ultimately, the Government and taxpayers while the housing developers laugh all the way to the bank.

This ill-conceived HGC is not the solution to minimise abandoned housing projects. The only way to minimise abandoned housing projects is when developers have to use their own money and not house buyers’ monies (under the sell-then-build system) in order to complete a housing project. When people use their own money, they will be more careful.

This ill-conceived HGC will face all the same problems to revive abandoned housing projects, that is to deal with so many different parties, namely house buyers, end-financiers, bridging financiers, insurers and all of which have different objectives and interest.

Built-Then-Sell (BTS 10:90) concept

Under the BTS 10:90 concept mooted by HBA, the bridging financier can immediately take over an abandoned housing project without having to deal with so many parties and the task of reviving the project will be much easier.

Under the BTS 10:90 concept, the developers will walk away empty-handed should the project be abandoned as the developers will only have access to house buyers’ funds when the project is successfully completed. Under the BTS 10:90 concept, should the project be declared abandoned and the developers had taken a bridging loan to fund construction cost, then the developers’ financiers can take over the project, and it will not involve any public funds.

The BTS 10:90 model as proposed by HBA is the solution to minimise abandoned housing projects as under the BTS 10:90 concept, the developer must use its own monies or borrow from banks to launch and successfully complete the housing projects. Under the BTS 10:90 concept, the developer will suffer the most if the housing project is abandoned. Hence, the developer will do all it can to ensure the project is completed on time.

But first some questions:

> Why burden house buyers with payment of premium of between 0.5% and 1% (of the house price or the loan amount) when the benefits of lower risks accrue to banks and developers who bear no upfront cost. Is this not another case of hitting innocent purchasers to spare developers?

> Invariably, a tax payer unable to afford to buy a house is actually funding a house buyer to own a house? Does this make sense to you?

> Who will ensure the interest rates charged for home loans by financial institutions will be reduced for this scheme? 

> House prices have shot through the roof. Why the additional cost to buyers whose affordability is already severely constrained?

> Why should the Government fund the scheme but house buyers still have to bear extra cost?

> What are the pre-conditions that must be fulfilled before HGS is activated? Will there be a continuing set-back for victims of abandoned housing projects?

> Is there a need for additional public funds with layers of bureaucracy and headache just to buy a livable house?

> Isn’t the proposed HGS seen for what it really is – an exit door for errant developers? The errant developer will wind up the company and its directors will go scot free by hiding behind the corporate veil, something which happens too rampantly. Then, the HSC is left to deal with another abandoned project. Isn’t this another form concocted as false protection for house buyers?

> Is the Housing Ministry mindful of the news headline “Korea Housing Guarantee Receives Massive Bailout” in 2001? It was reported in the Chosun media on May 31, 2001 that the government and creditor organisations decided to inject a total of 1.84 trillion won into the Korea Housing Guarantee Corp, which has tottered on the brink of insolvency, to put the state-invested housing guarantee firm back on track.

The South Korean model which has been touted by developers as the way to go has to be studied thoroughly. Maybe there are now robust checks and balances in South Korea for the protection of house buyers from unscrupulous developers.

The minister and his ministry should engage all stakeholders before making a decision. What is good for South Korea may not be good for our country.

Chang Kim Loong is the honorary secretary-general of the National House Buyers Association (HBA), a non-profit, non-governmental organisation manned by volunteers.