Reevaluating the property sector

July 25, 2008. D-Day. The events of the day will be keenly watched. The market is expecting a possible interest rate rise on that day as Bank Negara meets.

“We expect interest rate go up as early as July 25 ... we expect a 50 basis points increase, or 0.5%, to be done in two instalments between then and the end of the year,” says an analyst.

Indonesia has increased its key interest rate 25 basis points to 8.75 to curb soaring inflation which could rise from 11.03% to 12.5% by the end of the year. Eurozone rates hit a seven-year high as it battles inflationary pressures.

As we take a short breather from the roller coaster ride that has been inundating the country the past several weeks, we have to admit these are interesting times, on the national front and globally, politically and economically.

Never in the last five years has inflation in the country hovered at more than 6%. That’s June for you. With the rise in electricity tariff, this may go up to 7% for July. Generally, it’s been around 3%.

Binding the national political and economic scenario is the global credit crunch, rising food and fuel prices.

Bankers and developers say the second half of the year will be challenging and stressful. There may be a period of slowdown between now and the end of the year.

The general consensus is that “it will take a year before things stabilise.” The more optimistic think six months.

What does all these spell for the property buyer?

Reassess financial position

For those who already have a housing loan, Citibank director for mortgage business Goh Ching Chee says it is important to think about their financial resources and interest payments.

“Think through the housing loan instalments, daily expenses, and the price of the house they want to buy. They have to factor this in so that there will not be any cash flow situation.

“This is also critical for those who are considering whether to buy or not. Many have said that property in prime location, in the middle to longer term, protects your capital, preserves and grows your wealth, that it is able to increase faster than inflation rates. While that may be true, there are some issues to consider in the light of the current situation.

“If you are thinking about property investment, recalculate your financial situation. There have been drastic changes in the market place and the situation, at this point, is still opaque. But high prices are here to stay.

“Will your strategy still hold water? Even if you are buying for own use, you have to think through to see if it makes sense. The key to it all is affordability.”

Hedge against inflation

While property is considered a good hedge (something that holds its value) against inflation, there are certain caveats. Says Goh Ching Chee: “Properties in good location will stand the test of time better. In challenging times, prices do not go down that drastically if these properties are well located.”

Pre-1997/98 financial crisis, Bandar Utama properties were hovering between RM300,000 and RM350,000. Soon after the crisis, it went even higher than its pre-crisis level. Today, prices are in the RM700,000 region.

Goh says landed properties generally outperform other property segments in a downturn.

Goh says house prices will go up because raw materials have gone up considerably. Within a year, steel went up from RM1,200 per tonne to RM3,600 last month. It has upped further now (see table).

Coupled with the cost of construction is the rise in petrol, which has gone up as much as 77% between May 2005 and today, diesel by 139% for the same period.

Property prices will, therefore, move up. Compared with Singapore, Thailand and Vietnam, our property prices per sq feet is still cheap while China is due for a correction.

“For first time property buyers, before they commit themselves to a loan, talk to as many people as possible – bankers, loan officers, relatives who have experience buying a property or taking up a loan. Do some research, drive around the place at night and during the day.

“The needs of a single and a married person are different. Those with children must consider the school factor. A property is a long term investment.

“Young people today tend to buy a car before buying a house. I would encourage them to buy a house as this will hold its value. If mobility is a factor, get a cheaper car, or car pool. Besides being able to hold its value, rooms can be rented out. These are some of the ways they can adjust to a new lifestyle.

“Just because fuel has gone up 41% does not mean our salary will. So instead of wasting time or griping about it, re-evaluate your lifestyle and commitments,” says Goh.

Developers re-evaluate

For the developers, they have to reevaluate their products in line with the increase in raw materials. How will they protect their profit margins? Where is the demand going to come from, and will there be healthy demand?

A lot of projects are planned and calculated more than 18 months ago. They have to adjust their selling price, or take a smaller profit. So they have to do a feasibility study.

Goh says some developers think they are protected because they have locked in their prices and will not be affected by price increase of building materials.

“It may not be as simple as that. If the contractor is going to lose money, they will just walk away from the job, which is what we are seeing today. If the guy walks away, the developer will still have his obligations to buyers.

“Some developers are more realistic and are working with their contractors by supplying the raw materials to cushion the impact of rising prices,” says Goh.

Developers of the lower end housing will be impacted more than those building the high end segment.

“The next six months will be interesting. There will be uncertainties and opportunities. Those who are financially savvy are already preparing themselves.”

Now and then

In order for a household to adjust to the current challenging times, it is important to note the differences between now and the two previous recessions.

In the 1985/86 slowdown which started in the USA, Asia felt the economic pains only in late 1987/88. By the late 80s, direct foreign investments came in and factories were set up.

“At that time, we had the cost advantage. Big Japanese brands came in and we became the largest exporter of air-conditioners. We do not have that cost advantage any more today. Instead, some of these factories have moved to China and other countries which offer lower wages.

While labour may be cheaper, there may be an issue with systems as some of these countries may not be as developed as Malaysia. What is certain is we must raise our efficiency.

“In the 1997/98, the Asian financial crisis we exported our way out of recession because the ringgit was cheap and recovery came quickly in 2000. The situation today is different and to a certain extend, worrying,” says Goh.

Food and fuel prices have gone up. Construction materials have gone up. The subprime issue in the US is a major dampener. This year and next, Malaysia will have to go through a period of adjustment and re-evaluation.

Almost every country is having some sort of stress. Consumption and speculative investments have gone up significantly, chasing after limited supply.

Are high prices here to stay? - BY THEAN LEE CHENG (The Star)

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