Thursday, March 04, 2010

Property Bubble Concerns Across Asia-Pacific

Asian countries fearing a disastrous US-style property bubble are striving to cool down their real-estate markets as the region powers out of the global financial crisis. Policymakers are worried that excessive exuberance could push property prices far above their real value, only to crash and bring down with them banks that lent money too freely and individuals who borrowed beyond their means.

titikamal

"It is better to pre-empt a bubble than wait for it to get serious and have to take more drastic measures," Singapore Prime Minister Lee Hsien Loong said last month after the city-state took fresh measures against speculation. Low interest rates, strong demand and speculation have pushed property prices in many Asian cities higher, in some cases surpassing peaks reached in 2007.

"The risk of an asset bubble is quite high in certain (economies) such as China, Hong Kong and Singapore," said Chua Yang Liang, head of Southeast Asia research at property consultancy Jones Lang LaSalle.

In China, property prices in 70 major cities hit a 21-month high in January.Beijing has tightened lending, requiring buyers of second homes to put up a downpayment of at least 40 percent, and they also face higher interest rates on their mortgage loans. In Singapore, where housing prices have been heating up since last year, the government slapped additional duties on sellers who flip a residential property within a year of buying it.

Home buyers are also now limited to borrowing up to 80 percent of the property's value, instead of 90 percent.In densely packed Hong Kong, home to one of the world's most frenetic property markets, authorities are fretting about a surge of speculative money since late 2008.

Starting April, the territory will increase the stamp duty for sales of flats worth 20 million Hong Kong dollars (2.6 million US) or more from 3.75 percent to 4.25 percent. Prices of some Hong Kong luxury flats have returned to 1997 boom levels.

Australia's central bank on Tuesday lifted interest rates afresh. One factor it cited was a "solid" increase in mortgages, "and dwelling prices have risen significantly over the past year". Median house prices in Sydney rose 12.1 percent in 2009 and 18.5 percent in Melbourne, and observers said the rise was likely to continue.But Simon Vinson, head of Asian property at AMP Capital Investors, said he did not see the overall Asian market overheating.

titi bkamal

When you ask around, most will cite bubble conditions in HK, Singapore, Australia and China. But somehow no one seems to think Malaysia is having a property bubble as well???!!! Do I think there is a bubble in Malaysian property, oh yes! Ask me that question again during the talk.

How do you know there is a bubble? When everyone cites only the positives: low interest rates, comparative valuations ... I see big bubble in HK and Singapore, driven by truckloads of buyers from China. In Singapore, they cite the inflow of PRs pushing up prices in private apartments and HDB housing. The whole thing reside on the recent financial crisis which saw truckloads of stimulus left, right and center, but Asian banks and corporates were really not that badly affected. Properties in Asia DID NOT go to the extremes like in the US subprime party or CDOs driven gains in most of Europe, in particular the UK and smaller European nations. Now with the stimulus, we have too much liquidity swishing in the system. Most Asian central banks are still keeping rates low to keep in step with US and EU rates as exports and real economy are still recovering. I see liquidity being diverted into property in Asia-Pacific.

Yes, some countries are hotter, such as Australia, HK and Singapore. China is next but Malaysia is not far behind. In Malaysia there are two markets, its the new developments that are getting the bulk of the funding and cheap financing. Seriously, look at our affordability ratios, how can families keep up with RM500,000-RM800,000 loans??? Unless I am mistaken, most middle class families don't make more than RM10,000 a month.

Have a look at just completed properties over RM1.5-2.0m, even after 6 months, more than half are empty. Those below RM1m still mainly owner occupied. Many of the higher priced ones are people's second or third investment homes or owned by foreigners. We all know what kind of yields these properties can get locally don't we.... lucky to get 3% yield. However, the party is still on because the foreigners are mainly Asians and they are riding on a good property wave in their own turf, hence no need to sell. See if there are buyers for properties above RM2m in the secondary market... very very few.

Of course no property developers would be caught dead saying its bubbling over. So, how will the whole thing unwind, we need one major market to correct and then you see the domino effect. Property markets are different to stock markets, their bull run is more sustained and the unwinding takes a lot longer. When you are in the property markets, its hypnotic and crowd driven. Every profitable sale gets whispered louder and louder, do you want to miss that. I have a friend who bought a Desa Park City link house and it has risen by RM400,000 in 6 months, how to argue that that is wrong.

Safe to say that a lot of new developments are still being built, even the super luxury condos in KL and Bangsar are mostly still under construction. It takes time to see a correction but its coming. You just cannot make a timeline prediction. Unless you can see a normal executive in their 30s being able to buy at RM1m, without any help from their parents, then you can say its affordable.

The worse defense is that Malaysia is still cheap compared to Singapore or HK .... so what???!!! When is there an average for Asian property prices??? That argument is the same as saying my salary in Malaysia will soon double because its so far from Singapore's salary - yes, quite bullshitty. So, make your money while the sun shines, and then hope that it is sufficient to cover the losses when they correct.

p/s photos: Titi Kamal

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Friday, March 10, 2006

Asian Real Estate


Or Why Malaysian Real Estate Is So Cheap

Did you know that KL real estate is one of the cheapest in Asia - another reason why 5 star hotels in Malaysia are also among the cheapest in the world. One can understand if Malaysian real estate values lag those of more developed nations such as Singapore, Hong Kong, Seoul or Tokyo... but KL even lags Indian cities, Bangkok and certain places in Jakarta. We can understand why Shanghai or Beijing would be more expensive too compared to KL - population, out-sourcing and investment.

Is this a correlation to our GDP per capita (roughly translated is how much money a citizen earns in a specific country a year). The figures were obtained from CIA files, yes the American Central Intelligence Agency for 2005: www.gov/cia/publications/factbook/rankorder/2004rank.html

1) Luxembourg US$62,700
2) Equatorial Guinea US$50,200 (where is that, I want to move there ... but a cafe latte will probably cost US$15)
3) Norway US$42,400
4) USA US$41,800
8) HK US$36,800
16) Canada US$32,800
18) Australia US$32,000
20) UK US$30,900
22) Japan US$30,400
26) Singapore US$29,700
36) Taiwan US$26,700
41) New Zealand US$24,100
42) Brunei US$23,600
51) South Korea US$20,300
82) Russia US$10,700
83) Malaysia US$10,400
86) Mexico US$10,000
88) WORLD AVERAGE US$9,300
97) Thailand US$8,300
118) China US$6,200
132) Philippines US$5,100
150) Indonesia US$3,700
155) India US$3,400
229) Somalia US$600
231) Gaza Strip US$600
232) East Timor US$400

If you look at the table above, it bears little correlation. A poor country can have high city real estate values - hence a big factor is city population. You need to cram a lot of people into a tiny space, then real estate values will soar - take New York, Tokyo, HK, Singapore, Bangkok, Shanghai, Shenzhen, Karachi, Mumbai ... many are in the region of 10-30 million city population. KL has about 5 million but it is also quite spread out. So, another factor is it has to be CRAMPED - or rather business activity CBD has to be cramped.

Another factor for high real estate values is whether you are a financial center. Is your city a crucial outpost to doing business in the region - HK, Shanghai, Singapore, Tokyo, Mumbai, New York, etc... KL is neither here nor there. What about Bangkok? Well, it has a super duper population (have you seen the weekend exodus from Bangkok every Friday). Even though it is not a financial center, it the the center for a country with a decent population size. If your capital city is the center of a country with a decent population, you can be assured of good commercial real estate values - e.g. Thailand, Taiwan, South Korea. We need Malaysia to move quickly from 26 million to at least 60 million. Then you can have some good ripple on effect on real estate values.

If you are not a financial center, you can still command high rates if high-value services businesses are aplenty. Hence Singapore's commercial real estate will have a very strong long term uptrend as it does not depend on its reputation as a financial center/port/MICE biz like HK but moves higher up the value-added curve by encouraging designers/inventors in animation, biotech, education, etc. Does KL look like a city with good high value added industries?




Good amenities and public infrastructure would not be a bad thing, look at Tokyo, HK, Singapore or even New York - but infra is not crucial in giving higher real estate values. If you look at the capital cities of the high GDP per capita countries such as Oslo, Amsterdam, Stockholm, etc.. you will find that good infra is a good thing but not necessarily stratospheric real estate prices.

Lack of good quality commercial space will also spruce up real estate values. Just look at Indian cities, cities in Vietnam or even Jakarta. We in KL, unfortunately builds okay buildings cheaply as land is cheap and plentiful. I mean, KL commercial just keeps getting drawn wider and wider. First the CBD, then the city kind of move wider to include PJ, then it moves out to Shah Alam, now Klang. Too much cheap flat land.

So, commercial real estate value in Malaysia will lag the rest of Asia, even some cities in Vietnam (my gawd), and it will not change until the fundamentals change. The only exciting part for Malaysian real estate is residential, and you know how people get crazy with houses, every now and then, good houses in good locations will have its own bull run. The rental yields never match the house prices - but hey, who the heck cares. Commercial and retail, fergedaboudit!

8 comments:

easystar said...

Hi SD,

Moving to Equatorial Guinea? You got to be kidding. It is a country next to Cameron with huge oil reserve and run by dictator with a small population. Most people live in poverty. Coffee isn't $15 either - its PPP multiplier is about 2 (i.e. stuffs are about half of those in the US), perhaps in the expats/oil area.

Property bubble...heem..it depends whether we are heading for a deflationry environment or inflationary.. which no one can really decide right now..

hishamh said...

Dali,

I don't think we have a property bubble - at least not a general one. If at all there is a bubble, it's entirely confined to the Klang Valley, and only at the high end.

The total MHPI has been flat to declining since early 2008, and so have most of its components - in fact high rise prices have generally been falling. Breakdown by the main region suggests price rises have been modest. Affordability is of course another separate issue.

Residential loan growth isn't showing any signs of a bubble either - between 7.5% to 10% yoy, 0.5% to 1.0% mom since 2006. Growth has been trending down since the early part of the decade, when it exceeded 15%.

At the macro level, even if we see a crash in high-value properties in the near future, confined as it is to selected spots in the Klang Valley such as the KLCC area, there's not going to be much pass through into the wider banking system through rising loan defaults leading to a pullback in lending - which means no real implications for the broader economy either.

Andrew said...

Agreed. Malaysia cannot be compared to Singapore or Hong Kong where land is scarce. The ridiculous upward spiral of property prices in the city areas of Malaysia and near city areas are the result of property speculators looking to make a quick buck and not taking into considerations the inevitable damage they are causing to the real estate market here in Malaysia. I sure as one will not be fooled into paying exorbitant above market prices and I am sure in time, things will unravel itself. I mean come on, 40% rise in less than a year? that is ridiculous.

khuhsi said...

Feb. 24 (Bloomberg) -- Hong Kong’s economic growth beat estimates in the fourth quarter and Financial Secretary John Tsang forecast an expansion of as much as 5 percent this year as he moved to counter the risk of a property bubble.

Tsang switched today to forecasting a budget surplus for the year through March 31, rather than a deficit, on land sales and extra government revenue from surging property and stock transactions. He announced a higher stamp duty on home sales of more than HK$20 million ($2.6 million) and said measures could be extended to cheaper properties “if there is excessive speculation.”
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bonnie said...

Hi
I completely agree with the proposition that there is a property bubble but more specifically in KL/PJ area. I was lucky enough to buy a 1450 sqft condo in Mutiara Damansara for GBP40,000. Now the same developer is selling a new development in the same area and the cheapest unit is an 850sq ft for GBP100,000. After having experienced the turmoil of the financial crisis in London, I would stay away from the bubbly property mkt in KL/PJ area. But I would hold my current unit as it was a cheap buy!!!

Ceage said...

Great post!

Definitely the bubble in Malaysia will burst soon! Interest rate has just risen, give it 6 months to see the impact. Penang property prices have gone up even crazier than KL! Single terrace house 1700sf bad condition is asking for 585K!

The price hike was mainly due to investors taking profits, buying and selling, not real demand supported by local folks.

So many apartments have very low occupancy rate, a lot of properties are out for rental but noone is renting even in prime area coz the price has gone up too much!

Do you think the price will sustain?

Supply more than demand will definitely drive the price down! Those investors who leverage on bank loans with many units will panick when their units cannot rent out while the bank rates keep going up!

So, be patient and hold your horses for now or you might be caught!!!!

thk said...

True is that everyone is not going to buy cause of the high pricing while the landlord not going to sell since they still affordable to hold on to the asset while the interest (monthly housing loan) is still low. So pricing will still move upward since buyer still snap up property like no tomorrow.

Understanding that properties in country such as Singapore, Hong Kong bounded to rise in price cause the land is limited.

But for some state in Malaysia, price has gone crazy even there are plenty of space around. You still can purchase land and built housing on top of it for 30~40% cheaper than the retail price. So you be the judge (Rich Dad Poor Dad mentioned that a good investment is where u purchase at good price not when selling)

jason haris said...

I loved reading this piece! Well written! :)

jason
RMP Property