Tuesday, September 07, 2010

Malaysian Property Bubble?

If you say Malaysian property bubble, it does not look so plausible ... but if you replace it with KL or Penang property bubble, you have more nodding heads - with possibly the property sales and developers disagreeing.

Malaysian Insider: Prices of residential property have surged by as much as 35 per cent in the past year despite a growing overhang in supply, far outpacing income growth and giving rise to concerns that the market is becoming unsustainable.

Figures provided by the National Property Information Centre (Napic) show that average prices for homes in Malaysia rose a whopping 19 per cent to RM273,000 in the first half of this year, from RM220,000 in the same period last year. For Kuala Lumpur, the increase has been even more dramatic, rising an eye-watering 35 per cent to more than RM700,000 in the first half of the year, up from RM523,000 last year.

The market, however, may be starting to lose its appetite for properties due to the high prices.

Napic’s Property Overhang reports show that unsold properties in Malaysia rose to 22.6 per cent of new launches in the second quarter of this year, from 19.5 per cent in the fourth quarter of last year. For Kuala Lumpur, unsold properties rose to 16.1 per cent from 15.8 per cent, while for Selangor it rose to 14.6 per cent from 12.4 per cent.

Checks on developments completed this year also show that vacancy rates remain at 50 per cent or higher.

The Edge business weekly reported recently that the government is mulling capping mortgages to 80 per cent of value in a bid to keep the market from overheating although MCA has come out strongly against the move. This comes as Singapore introduced a series of measures to reign in investors and speculators, such as a 70 per cent mortgage cap for buyers with more than one property and launching 36,000 public housing units this year and next.

While Napic does not have a housing affordability index, a rough calculation shows that the average price of RM273,00 is about 5.6 times that of an average annual household income of RM48,000. The average price of a KL home is now a steep 13 times that of the average urban household income of RM54,000 and a possible sign that the market is headed for a bubble.

The sharp increase in prices is said to be at least partly due to speculative demand as investors snap up multiple properties in the hope that prices will keep on spiralling upward — despite low occupancy rates that could affect rental yields.

Some real estate agents and developers have privately expressed worries that the market is already too speculative and the price escalation is not sustainable.

“I am all for sustainable price growth but the current market is too speculative,” one developer told The Malaysian Insider. “Most of the units are taken up by employees of the developer hoping to sell for a profit when the development is completed.”

Many developments completed in the past year such as Ameera in SS2 Petaling Jaya, Cova Suites in Kota Damansara and Challis Damansara in Sunway Damansara are experiencing only about 30-50 per cent occupancy rates, according to real estate agents. A check on new high-end condo Zehn in Pantai where sellers are asking for RM2.2 million per unit revealed the building to be almost completely dark at night.

Rental yields are starting to slide given that supply far outstrips demand.
A typical unit at Ameera is on the market for RM750,000. Given a 90 per cent margin of financing (MOF) over a 20 year tenure, the monthly loan repayment for a unit there works out to be about RM4,855. Rental rates at Ameera, however, are only about RM3,000 for a partly furnished unit.

A stand-off could be developing where buyers are now balking even as sellers are trying to hold out for higher prices.

Housing and local government minister Datuk Chor Chee Heung said that the high savings rate in Malaysia meant that there appears to be no shortage of takers despite the prices. He added that there will be a limit although he was unclear as to how far prices will continue to rise.

“We have to continuously tell developers not to push the boundaries,” he said when contacted by The Malaysian Insider. “There is bound to be a maximum.”

Chor said that the government is building some 76,000 low cost units that cost about RM42,000 each in the next three years, but it is unable to tell private developers how much to build to boost supply of middle class housing in the market.

Real Estate and Housing Developers Association (Rehda) president Datuk Michael Yam said that the issue of rising property prices was partly due to an imbalance of supply and demand as more migrants move to land scarce Kuala Lumpur as well as higher cost of raw materials.

“Even if 50,000 new housing units are needed in KL, that is still a huge number to build,” he said at a recent Rehda media briefing.

One developer, however, privately expressed concern that the market had become too speculative and the dramatic increase in housing prices may become unsustainable.
Property speculation remains rife despite a supply overhang
“I am all for sustainable price growth but the current market is too speculative,” one developer told The Malaysian Insider. “Most of the units are taken up by employees of the developer hoping to sell for a profit when the development is completed.”

There are signs that the government is concerned that a real estate bubble is forming as investors pour money into property in the hope that prices will keep spiralling upwards.

The Edge business weekly had reported over the weekend that the government is exploring the possibility of increasing mortgage caps to 80 per cent of loan-to-value ratio in a bid to keep the market from overheating. This comes as Singapore introduced a series of measures yesterday to reign in investors and speculators, such as a 70 per cent mortgage cap for investors with more than one property and launching 36,000 public housing units this year and next.

Such a move, however, may only serve to hurt first-time homebuyers who will have to struggle to come up with the down payment whereas richer investors are unlikely to face such difficulties.

My Views: Yes, the property prices in KL and Penang are frothy, well, not just frothy but very frothy. The ones still bullish are usually those who still have one or two properties in their hands, looking to offload.

Almost every single valuation matrix would put property prices in KL and Penang in the overvalued category. The basis for housing - live in ownership or rental. For live in ownership, its affordability ratio. For rental, its effective yield relative to prevailing interest rates. On both accounts, affordability is out of reach and rental yields are falling rapidly.

Usually those still bullish will cite factors out of these two basis ~ most popular being foreign buying, followed by relative valuations compared to similar properties in other Asian cities. Bullshit and more bullshit.

Foreign buying, is basically speculation when they cannot even rent it out for a 2% rental yield. Foreign buying for capital appreciation is hocus pocus because locals will not take the foreign investors out ~ you bought at RM1,500psf, it will not be a local to buy from you at RM2,000psf. What you need is another more deluded foreign investor to pay you RM2,000psf.

Foreign buyers are mostly leaving finished units and houses empty. Don't believe me, go check out houses and apartments costing more than RM2m and RM1m respectively. If you can get 50% occupancy, call me and tell me where!!!

Relative valuations argument is even stupider, if you are a qualified accountant in Malaysia, after working 5 years you may get RM8,000 a month ... does that mean you will get RM8,000 a month in HK, Singapore?? Of course not, you may get HK$35,000 and S$7,500 a month. So, how does the relative property valuations argument stand up??? Properties, like any asset is just a reflection of the earning capacity of their residents .... unless you tell me that the bulk of Malaysian properties are taken up and lived in by foreigners!!??

But property bubbles do not get pricked so easily. When low interest rates is prevailing and other sectors of the economy are so weak, central banks cannot just raise rates to dampen property speculation as the broader economy will get hurt.

As unpopular as it may sounds, the measures will have to be property sector specific. I will support the following: anyone buying their second, third , etc properties ... should only be allowed a maximum of 70% loan from any financial institutions.


easystar said...

Hi SD,

Thanks for the post.
Oh yes, the global stimulus (including Chinese stimulus) has now caused (or extended) property bubble in Asia as well. I have no problem with it if nobody needs to be bailed out by the government as the market will take it course but that is not likely to be the case.

kl said...

It's the local banks with their easy loan schemes for new properties built by developers that are helping fuel this speculative bubble. They have ample liquidity and few sectors to lend to. They have forgotten about property bubbles. When the property crash comes, watch out for troubled and failing banks too.

Malaysia said...

"Properties, like any asset is just a reflection of the earning capacity of their residents .... unless you tell me that the bulk of Malaysian properties are taken up and lived in by foreigners!!??"

How about M'sian who work at foreign countries (few hundred thousand of us) who decided to buy property in M'sia for our retirement? Since there are a few hundred thousand of us, we can easily snapped up all the properties.

Raymond said...

The developers and bankers are no doubt conniving to fire up the property prices. When the neighbouring propery has value of RM500k, the developer will launch the first phase at RM600k, and the second phase at RM650k, and the 3rd phase at RM700k. The bankers will dance along with the developers with easy mortgage loan as it is perceived to be low risk. Such a pricing tactic not only enable the developers to reap extraodinary profits, it also stir up the prices of older properties as buyers are left chasing the prices set by developers.

It is the greed on the part of the developers and bankers that have caused house prices to move beyond the affordability of most Malaysian families.

Pity the younger generation. With house prices like these and our salary scale, even with 95% financing made available to them, the vast majority will still not be able to afford a decent house without their parents' financial support. Something must be done to stop the situation spiralling out of hand!

So tell us please MCA, you are on the side of the greedy developers and bankers or with the vast ordinary, average wage earners?

kl said...

Malaysia, how many of you will return here for your retirement or otherwise? Priority is a roof where you are working and living. I know mine was. How many with that much spare cash to lock up in a vacant property that will deteriorate if not looked after. There are better ways to make your cash work for you.

Kingsmen said...

the banks are already practicing 70-80% financing!!!

Malaysia said...

I'm returning for my retirement. While that is still far away, I'm investing my $$$ into property in KL which generates quite a high yield (easily 7%) as compared to 3% in the country where I'm residing at the moment.
And I do know fellow Malaysians who are also working overseas are now aiming to buy bungalow at Damansara Heights.

kl said...

Very interested to know what residential properties gives 7% gross yield on current market prices and rentals in KL. Not landed residentials for sure. Maybe selected high end condos if you can get good long term expatriate tenants. A large caveat.

Yes, one good way to own a Dam Hts bungalow is a high paid job overseas with surplus pay stashed away waiting for a sharp property correction, preferably in a recessionary or politically unstable environment where emigration may accelerate. This actually happened around 1987-89. Many in Dam Hts upped roots and left. Who knows, it may recur come GE 13 by March 2013.

Malaysia said...

To get 7% yield have to go for condo, but not necessary high end. Around RM200k - RM250k range is the best.
Of course with the last 6 months price appreciation, it is now harder to find such deal.
No need high pay job overseas to accumulate wealth. Most of us are just getting same pay but it a different currency. Some lucky one are actually posted to work in KL.

jeremy tan said...

I work in Australia and i bought 2 properties in Penang this year. I am a Malaysian, just working abroad and earning in AUD.

There is still no place like home no matter where you go.

It is just what i call purchasing power parity.

Hope that helps


Marco said...

I have started to buy-in REIT since early 2010 due to the property value appreciation.

So far, most of the REITs price is still stagnant.

Malaysia said...

Hi Raymond,

I couldn't agree on your point. It is the greed of the developer investor (not banker) which pushes the price up. If nobody buy, surely the developer will not be able to sell at high price.

If project fails, bankers are the one that's left with unperforming loan.

klproperties1234 said...

kl, i'm another one who works in the middle east and has properties in kl worth >RM1mil. FYI, there are quite a few of us too.
buying a property in mid east is definitely out for me, because i have no interest to settle down here at all.

Saayi said...

Hey guys, its time to invest in gold and silver. Property market is in a massive bubble, thanks to cheap financing. Most people are buying houses, from printed paper money...monopoly money with no gold backing. Hence the inflated price of home not the actual value of the house. It's time to get out or get stuck. Its cheaper to rent for now and wait till the bubble burst. All major investors are moving to gold, silver and commodities.

Saayi said...

I agree with Kl . The percentage of Malaysians working in foreign countries and bringing back their cash to reinvest in Malaysia is a matter of anybody's guess. As "Malaysia" and "kl properties 1234"had put it , you would expect nearly every one of those "Hundreds Of Thousands" of people to be coming back here to invest. I am also a Malaysian living and working abroad, and I dare say that I would not bother to put my money into properties in Malaysia. Economics is about supply and demand and as price goes up demand comes down. This is a law. Unless Malaysian property market does not follow economic principles, I believe the "bubble" will burst. And when it does, the only ones who lose most are the buyers/speculators who decided to "invest" in an already heated and overvalued market. I guess you can face the facts or live in denial because you were one of those who decided to "prop" the property market, with your foreign earned cash. One things for sure, time will tell. Unless we can circumvent that law as well.

atisha said...

Is this a serious blog? I'm getting very distracted with the girl pictures practically on every paragraph. I don't think this report is to be taken seriously though well written.

away said...

Overall, a good article... and with the occasional eye candy images... two thumbs up!.. Lol...

JGK said...

Currently i'm working in Australia.
Just look at melbourne, brisbane. The mass corrrection has started. Got a cousin in KL (5yrs graduate)who has 4 booked property around KL ( with a combine household salary income of RM8000. It seems his working colleagues are on the same league of property games. Based on my analysis they hardly could service one single completed property....only waiting to make quick bucks by selling the moment it's completed. Good luck Malaysian markets !