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Soaring house prices a major concern [07-08-2013]  
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As Malaysians continue to lament the high price of houses, Tan Choe Choe and Arman Ahmad speak to several experts to find out what is happening in the property market and what, if anything, should be done about it

AT a recent condominium launch in Sentul, it took a mere two days for the 900 odd units to be sold out. This despite each unit, slightly more than 1,000 sq feet, costing about RM800,000.

There were so many people at the property launch. Some waited from the night before and placed shoes and pieces of paper and arranged chairs to indicate their place in line.

When they reached the showroom, it was like a game show -- each participant was given exactly one minute to choose his or her unit. Those who failed to do so would lose their turn.

Of course, a great number of the people who attend these kind of sales are speculators -- people who purchase the properties with the intent of making money when they later sell it.

With the prices of property on an upward spiral, buying a home is always a winning proposition. But while some people are still able to afford the sky-high prices, most Malaysians can't.

"I think it has come to the point where maybe up to 60 per cent of Malaysians cannot afford to purchase properties," said real estate valuer Dr Ernest Cheong.

He cited the price of an average terrace house in Klang Valley -- about RM700,000 -- as an example.

"In order to buy this house -- if you take a 30- year loan -- it will cost you about RM3,800 per month. About 60 per cent of Malaysians earn RM4,000 and below. This means that even if you forego eating every month, you still can't afford to pay the monthly instalments," he said.

What has driven prices to such stratospheric levels?

Cheong contends that a number of factors have driven the prices of homes beyond affordability. It involves the banking system, the younger generation's willingness to take on debt and the culture of instant gratification, as well as unscrupulous practices by developers.

Firstly, the central bank's policy on loans has made them easily available to the people. This has created a surging, but artificial, demand for houses, as people sign up for larger and larger loans. Simply put, people are signing up for more debts, with reckless abandon.

Their willingness to buy is also based on the assumption that Malaysian property prices will keep on going up.

To put this in perspective, Cheong gave an example of how homes were bought in the past, as opposed to how they are purchased today.

"When I started working in 1965, I rented a small place to live in. Every month, I saved part of my salary. In those days, the banks gave loans of up to only 60 per cent of the value of the house. In five years, I finally managed to buy a terrace house for RM11,000. I paid 40 per cent upfront and the remainder I paid off with a 10-year loan," he said.

Today's graduate, however, would have a radically different approach to home ownership, said Cheong.

For starters, loan tenures have been extended from 10 to 12, to 15 and finally to 30 years.

This, combined with an increasing culture of instant gratification, would see fresh graduates applying for a 95 per cent loan over 30 years, fuelled by the belief that property prices will continue to rise.

"It's not true that house prices will only go up and not down," said Cheong, a valuer with nearly 40 years' of experience in the industry.

He said the Malaysian public had the perception that "if you don't buy now, property prices will be higher tomorrow".

Cheong said developers also had ingenious ways to coax people to make it appear that their properties would quickly sell out.

"They create an atmosphere of demand and rush."

He added that some developers would invite investor clubs for pre-sales viewing.

"Before the launch, they make a deal. They will sell a certain percentage of units to them at a discount. These are confirmed sales."

He said the quick sales of these properties made it appear to the public as if the units were selling out fast.

"It's basically a cartel. It gives a psychological edge. It creates a rush. All the while, the people are being led by the nose."

He added that the profit margin of developers was also more lucrative than most people thought.

"The rule of thumb is a five or 10 per cent margin. But some developers are earning 30 per cent minimum. Sometimes even 30 per cent of the sale price or higher."

He said that for many developers, the cost of purchasing the land was "historical". Much of their landbank was acquired for a nominal amount in the past.

Dr Yeah Kim Leng, the group chief economist of RAM Holdings Bhd, said that if house price increases continued to outstrip income growth, then the prices wouldn't be sustainable in the long term.

"Although some people, if they continue to enjoy high income growth, would still be able to sustain selected high-end housing segments, but in general, the overall affordability has declined for the average Malaysian due to the strong price increase in the past several years."

To people who think that Malaysian property prices are still affordable, or indeed low if compared to places like Hong Kong and Singapore, Yeah said: "Of course, if you look at the reality of purchasing power on a cross country basis, Malaysia is cheap, largely because of the high price levels as well as the strong currency of the other countries, for example, Singapore, but those are affordable for foreign buyers, not Malaysians."

He feels that the current situation of escalating property prices has reached a point of concern.

A combination of low interest rates, easy availability of credit, a positive economic outlook with expectations of a continued rise in property prices, has now transformed the property into an asset class rather than an essential item.

"Combine that with the fundamentals of a young population, with a rapidly increasing working age population, all these have continued to sustain the kind of price increases we've seen so far," said Yeah.

But is it realistic or sustainable in the long term?

"It will taper off in the long term because it will reach a point where it will be beyond reach, where only a small segment of Malaysians will be able to afford those high-priced homes. It will make the housing market more fragmented, with a strong focus on high-end developments that generate high profits. This will result in average Malaysians not being able to afford homes, especially first-time home buyers who are trying to start a family."

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