In the past few years, property prices in Malaysia have appreciated dramatically between 20% and 80% whether in major cities or smaller towns and depending on specific location.
This development can be attributed to the simultaneous financial measures adopted by countries near and far, during the global financial crisis of 2008-2009, namely:
- the quantitative easing QE1 of US$1.3 trillion and QE2 of US$600 billion by the US
- economic stimulus package of US$570 billion by China
- Singapore’s US$13.7 billion
- Malaysia’s RM67 billion (US$21.4 billion)
The simultaneous financial measures and economic stimuli flooded the supply of money and increased global liquidity. This caused the real value of money to depreciate relative to property. As such, the real value of money is getting “smaller” in comparison to property.
High liquidity, low interest rates and higher costs of land and construction materials are some of the factors pushing up property prices in Malaysia.
Recently, property prices in China and Hong Kong have begun to decline due to measures to curb speculative buying by their governments.
Singapore has imposed an extra stamp duty of 10% on homes bought by foreigners in early December 2011.
In Malaysia, since Nov 2010, the maximum loan-to-value ratio of 70% for the third and subsequent property has affected housing loan borrowings.
Real property gains tax as outlined in the 2012 budget has increased to 10% for the first two years and 5% from the third year to the fifth year.
Bank Negara has also introduced guidelines to rein in Malaysian household debt by assessing potential borrower’s nett income in their evaluation process from Jan 1st this year.
Gross Domestic Product (GDP) is estimated to be around 4.8% for 2012. Household debt to GDP ratio is expected to balloon to above 78% in 2012. Household financing facilities account for more than 55% of the total banking system’s loans.
Malaysia’s property market has begun to cool down during the second half of 2011 due to an oversupply of high-rise properties in the Kuala Lumpur City Centre and the Mont’ Kiara area.
General market sentiment has also cooled due to the slowdown in China, Europe’s debt crisis, stagnation in Japan and the US economic crisis.
The general trend for Malaysia’s property market in 2012 will be a slowdown due to declining liquidity, borrowing capacity and sentiment. It is likely the KLCC and Mont’ Kiara area will experience a price correction and lower rental rates for 2012.
Demand for newer, high-end landed residential properties such as semi-detached and bungalow units with prices above RM1mil may also decline in 2012. This is partly due to the relative rental yield to investment which does not justify the monthly loan repayment. For example, a RM2mil bungalow fetches only a monthly rental of about RM5,000 while the monthly bank repayment is approximately RM12,000 (depending on the duration of the loan).
Property prices in the city and its fringes may be stable but property located far from the city, may decline in price as the property market extends outward from the city during a booming market and contracts inwards towards the city during a market decline. The right type of property located in a good location will be stable in prices.
There are certain property investment strategies that developers, homeowners and investors in Malaysia can adopt.
For developers, the demand for properties above RM500,000 from foreigners is likely to reduce, due to property prices “correcting” in their own country, such as China and Hong Kong.
Properties priced above RM500,000 is beyond the affordability of most Malaysians whose average monthly income is about RM6,000.
The Malaysian population by July 2011 was 28.7 million. The new wave of baby boomers born during 1979-1985 (aged 26-32) are now in the workforce. Currently, 60% of the population is below 30. Low interest rates of 3% and the low unemployment rate of 3% will sustain the demand for properties below RM500,000 in 2012 by this generation. Developers may choose to develop more properties priced below RM500,000, phase out development to avoid oversupply, build property with attractive and innovative design, give more freebies to attract purchasers or build and sell a few years later.
Rent now, buy later
For homeowners, the strategy may be to rent first in a preferred or selected area and buy later. They may also selectively, “bargain-hunt” the secondary residential market for renovated property below market price or buy from established developer with all the freebies.
In recent years, most investors invest for capital gain, for 2012, the probability for capital gain is reduced due to the high prices and changing global economics which has dampened sentiment.
The upside for capital gain may be limited for 2012. Property investors may consider changing from a capital gain strategy to a cash flow strategy - change from buy- and-sell to buy-and-hold for rental income.
Investors can choose to reduce or sell property that have appreciated in value, such as no-income property or low-income yield residential properties such as vacant land, bungalow lots, super-link, semi-detached and bungalow homes.
They can then choose to reinvest in high-rise residential properties (apartments and condominiums) with yield of more than 8% in a high-occupancy area. Reinvest in commercial properties which can yield more than 6% in a high-occupancy area such as shop-offices, shophouses, shoplots, retail lots and factories.
The above observations and proposed measures to adopt are only my opinion of the probable trend in the property market.
However, during times of uncertainty, one’s financial defence measures become more important.
For a developer, a contingency financial plan should be in place for the worst-case scenario.
A specific and targeted group of purchasers and their needs should be identified. And the suitability of a project location with innovative design and quality building materials should be vital points to consider to attract various segments of purchasers.
For a home buyer, the monthly loan repayment should preferably, be less than 30% of one’s household income.
And one should also allocate money for an emergency fund to cover three to six months of one’s expenses.
For a property investor, a specific credit line such as over-draft facility should be in place for a period of low occupancy. There is always opportunity in property, if you know how to prepare and match your own financial capacity with the possible changes in the property market in 2012 and beyond.
We cannot change the direction of the property market but we can adjust our property investment fund and portfolios to prevent possible setbacks and capture the opportunities that arise from the changes in the property market.