Welcome to a speculator’s market

Since the last quarter of 2009, property prices have not gone up incrementally. They have escalated, especially for landed units. In certain locations, prices may be unsustainable.

Up to the first quarter of this year, intermediate two-storey houses in a popular part of Petaling Jaya were transacting at about RM650,000.

Yesterday morning, an agent said the company had sold several houses facing T-junctions (which are not popular units among buyers) in the same township. These were 2 1/2-storey houses. One was sold for slightly more than RM1mil, among the highest he has ever seen in that location for a house located opposite a T-junction while another was sold for RM950,000, the lowest among the three.

Even at RM950,000, he felt that it was rather high. He is also rather concerned about valuations these days. “I like this property business. I want it to grow. But not this way!” he said.

In certain locations, especially in gated and guarded communities, it has come to a point where valuers are reluctant to put a value on a property.

How do you pin a value on a house when next month the price will be different? Prices are simply moving too fast.

Due to pressure, the valuer may have to value it. If the previous transaction was RM1.6mil, he may then reluctantly value the next one at RM1.63mil. The result is that the price of houses in that gated and guarded development becomes increasingly higher. It eventually becomes a speculator’s market, not a buy-to-stay market.

While valuers play their role by succumbing to pressure to put a value to properties, banks do the same when they promote various kinds of creative financing. When banks advertise free legal fees, it is not truly free. That amount is already packaged into the scheme.

Banks too play a part in today’s increasing property prices. As banks consider the buoyant property market, and as competition among banks heats up, mortgages seem to be a good way to increase their loans business.

So they create all sorts of attractive schemes.

Last year, banks were promoting lending rates at base lending rate less 2.2%. Earlier this year, it was base lending rate less 1.9%. Today, a foreign bank is promoting base lending rate less 2.3%.

It is this which encourages people to sign up for several loans.

Over in the condominium sector, prices are driven by various factors. In a matter of weeks, a serviced apartment project will be delivering units to buyers. When it was launched several years ago, it was priced at about RM160,000 to RM170,000 for a 400-sq-ft unit.

Even before the keys are handed to buyers, prices of RM250,000 and RM260,000 are being bandied about today.

In the next 12 months, barring any contagion effect from their souvereign debt situation in Europe, developers will be having more launches. They are aggressively gearing up to launch their projects today.

So ultimately it looks like the resounding performance of our residential properties today is due to a lack of other better investment alternatives, including the volatile equity market.

So from buyers who are at a loss where to put their money, to the banking sector eager to give out more loans, to valuers pressure to put a value on a property, to agents eager to get their commission, and developers, at every level, all are part of the market forces at play.

Back to that house at the T-junction, here is some food for thought: Whether it is RM650,000 or RM1mil, the rental remains at RM1,500 a month.

·The writer remembers the US subprime crisis and how it pulled down the global financial system. There needs to be some prudence in our property market too. - by Thean Lee Cheng (The Star)

22 comments

August 7, 2010 at 3:56 PMDoris

Agree. Speculators have created a rather stallion-like competition which to most home buyers a total disaster. Although this boom is most probably going to fall off from the edge once it hits the turmoil point, the consequence is going to be very ugly if the authority isn't implementing something to help balance the situation.

 
August 7, 2010 at 6:14 PMlim

The authority is sleeping ... not working, not carrying out their responsibility, just thinking (dreaming) of "high income & less work". That fat lady from bank negara says everything is under control ..so no need to do anything and goes back to sleep..

 
August 7, 2010 at 11:30 PMEric

Well, it is just like US where if the music is still playing - nobody is looking to sit on the chair.

So, better be safe than sorry and look for a chair before the music stops.

 
August 9, 2010 at 11:25 PMPENANG

When new properties are mostly booked or sold even pre-launch, it is time to stay by the sidelines and watch.

Prices skyrocketing and BLR rising. The higher they go, the greater the fall.

And soon, "humpty dumpty will have a great fall".

 
August 10, 2010 at 7:56 AMAntsy Renovations

Everyone starts worrying when developers keep pushing the envelopes and announcing price increase. As long as consumer keep chasing after these launches, the price will never come down.

 
September 1, 2010 at 8:01 PMProp

LVR, or simply loan limit may be adjusted to 80%, from current 90%. Personally i don't think it is the right move. Big shot investors which full of cash will continue to bulk-buy, they may even get a better deal from developers. Genuine buyers and small investors looking for 2nd or 3rd will be badly affected in this case.


Property sector may face downgrade
News

The property sector is likely to be downgraded if Bank Negara Malaysia imposes a lower mortgage Loan-to-Value (LVR) ratio, says Kenanga Research.

Bank Negara is reported to have written to financial institutions to secure feedback on the possibility of capping the LVR for mortgages at 80 per cent to avert the risk of a potential property bubble.

Currently, banks can usually lend up to 90 per cent of the house value, or up to 100 per cent in selected cases, which has been handy for developers promoting their newly launched under interest absorption schemes like 10/90 home loan schemes.

Kenanga Research in a research note today said it would not be surprised if Bank Negara implements the 80 per cent cap on the mortgage LVR, or at least for properties more than RM500,000, as the government is clamping down on investment related property acquisitions.

"If implemented, we are likely to downgrade our sector call, as we expect property transactions to fall since deposit requirements will double, or essentially doubling the investment risk, limiting the number of homes that an individual can buy.

"We expect buyers to become more discerning when it comes to property choices, meaning stronger market leaders with branding and quality will be winners, when it comes to grabbing the market share of a smaller pie," Kenanga Research explained.

It is also maintaining a "trading buy" call on the property sector for now.

Kenanga Research said currently, the "buy call" is largely premised on strong sales achieved for developers, who are well positioned with several projects or aggressive landbanking.

"We look to review our sector and company calls in the next couple of weeks, pending further light on the matter," it added.

Meanwhile, OSK Research said it is unlikely that Bank Negara will enforce a strict capping of the LVR at 80 per cent across all residential property classes, but rather impose a restriction only on higher end properties.

"We understand however, most banks would have an internal risk control policy limiting the LVR to 85 per cent for higher end residential properties of more than RM700,000," it said.

Residential properties currently contribute to 26.6 per cent and 49.8 per cent of total industry loans and household loans respectively.

"Any excessive credit restrictions by Bank Negara on residential properties could be counter-productive, as it would encourage banks to redirect more of the liquidity to higher risk unsecured personal and credit card loans or lumpy corporate loans," OSK Research said.

 
September 1, 2010 at 11:08 PMtan

Bank Negara should just GO AHEAD and implement the loan limit to 80% of the house value !

All this time these greedy and unscrupulous speculators have been exploiting the high loan margin of 90% and above

House prices have escalated too fast to a ridiculous level within a short span of time and if this is not checked, will give rise to dangerous 'bubble'...

Don't wait until it is too late ..... !

 
September 2, 2010 at 12:04 AMrex

Bank negara to reduce housing loan margin to 80%

At last there is a glimmer of hope to rein in the escalating house prices

Each time Bank Negara take action to prevent rampant speculation, those with vested interest especially the greedy developers, real estate agents and including bankers will raise a hue and cry about the measures ...

Bank Negara must be firm in taking action and not bow to pressure from these groups with vested interest

and no more easy multiple loans for these speculators

 
September 7, 2010 at 5:56 AMPenang Fan

Allow 1st time buyers to buy at 10% down. 2nd and more home owners(mini investors/speculators) should be raised to 30% to 50% down. Rich foreigners who can pay cash should be limited to 1 property per person. Property prices are jacked up by such speculations. No one win accept house developers and speculators both local and foreign. Listen Bank Negara and hosing ministry!!! Problem solved!!!

 
September 19, 2010 at 9:34 AMAngeline

I think property speculation is only rift in certain areas of the country. We don't see this happening in Kelantan, Terengganu, Pahang, Perak, or even Negeri Sembilan. Properties there are rather depressed, so it is not untrue that Malaysia will not have 'boom-and-bust' situation like S'pore, HK or China. However, the same CANNOT be said of Penang island or Klang Valley. I will write based on Penang (as I come from there).

If a house that was sold in early 2009 at 500-600K is NOW being put into the market for 750-800K, approximately > 40% increase, in about one year, if not called speculation, what is?! and almost ridiculous - and that is what is happening in Penang island. Another case in point is that a high end condo of 150 units now has 134 units in the secondhand market! Definitely not owners.

Penang island is now only for speculators and investors. GENUINE house-owners are now held to ransom by these people by over-inflating house prices. This high levels of property speculation in Penang is encouraged by low bank interest, and a certain 'blind eye' by government agencies to the plight of genuine home owners in Penang island. Penang island is like one big casino right now - buy now, 6 months later, sell for 40% increase! And where do the ordinary, or newly employed, or civil servants stand? they do live and work on the island too.

I think Bank Negara and the government should seriously study what is happening - property should meet GENUINE housing needs, sure - rise in prices by all means, in line with inflation (we do need a measure of inflation to grow) - but at >40% in a year??

Help the genuine home owners own their home - don't let them be pushed to the periphery in their own state to speculators and investors, or as some speculators will say - 'buy in mainland if you cannot' - is that right? AngelineC.

 
November 10, 2010 at 7:17 AMDaeren

The investors here in Malaysia are not worried at all. The property burst will never happen. Price will continue to shoot up.

Curb them with max of 70% loan, so what? That just mean pay only 30%. Still easy to get 20% profit later a year.

I think we have to join in the speculators' club to be rich. Tired of being middle class average. I'm signing up.

 
November 10, 2010 at 7:35 AMsan

It is too late. The hype was over. The investors (who invested 2 years ago) already made their $.

The price already settled down for some condo since ~1 year ago...The Spring, I Regency...etc.

You should do some homework before committing.

 
November 10, 2010 at 10:50 AMProp

There is no point to put the blame on speculative/investment activities for the recent price hike. Penang Island is considered one of the prime location in malaysia outside Kl and Klang valley, these kind of activities are expected. Look at things from the different perspective, lets say you are looking/have purchased a house for staying, you would also expecting the price to go up instead of stagnant or gradual just like majority part of malaysia. For those who think cant afford a house now and hope to buy when market cools down or clash then, i can tell you this is not realistic. Lets say the history repeats itself as what happened in 1997, yes the price would drop drastically, but the BLR also will increase together. Dont forget also the economy will be bad and jobs will not be secured as well. Under such conditions, how many people would be daring enough to fork out hard cash to purchase a property, paying sky-high installments and not knowing whether tomorrow still have the job? My advise to eager buyer is to buy now, but do it carefully. Select the landed property or condo in good location or with future growth potntial can never go wrong.

 
November 10, 2010 at 6:50 PMJeff

Yes, lets say the market really clash and BLR shoots up to 10% (with no munus) which similar to what happen in 1998, the monthly installment for a 300k house would be RM2.2k for 30yrs loan, as compare to current rate ~RM1k. So again i believe RM2.2 per month is already >50% of the average malaysian yearly household income of Rm48k, again most people cannot afford. Also bank will not approve loan if the monthly installament >30% of the take home pay. So who to blame then? So, again, back to square one. If you are really lokking for a house to stay, stop complaining, worker harder and save harder then buy one now.

 
November 10, 2010 at 7:33 PMTim

Bank Negara will not let BLR to go up too high. It will cause a lot of people go bankrupt that leads to social unrest and then political mess.

But, watch out for the inflationary pressure caused by US Federal Reserve US$600B stimulus plan. A lot of hot money supply will float the market causing commodity price to go up. (Note: Malaysia government annual expense ~US$50B+)

Inflation will jeapardize the buyer's disposable income.

With that, there are 2 schools of thought.

a. Buyers (who need bank loan to fund the purchase) will delay their plan to purchase property or upgrade property. This will cause property market to be sluggish.

b. Buyers (local cash rich + foreign hot $) will jump in to buy purchase to hedge against inflation that will cause the property price to go up.

So, the answer depands on,

a. which group of the buyer forms the majority.
b. the supply situation (over or under)

I tend to believe buyers (need bank loan) are more and the market is over-supply (for condo)

 
November 10, 2010 at 7:46 PMTim

BTW, to show you how huge $600B is.

a. M'sia annual total export was $150B (2009)
b. China annual total export was $1,200B

 
November 11, 2010 at 6:24 AMalan

I was looking for condo in Georgetown in the past few months. I noticed that it is not easy to sell.

THe same units have been posted for many months.

e.g. Tanjung Pura RM520K, Forest Field RM400K & RM495K, Scotland Park RM580K, Lavinia RM410K, Logan Ville RM400K & RM450K...etc.

 
November 11, 2010 at 7:13 PMtan

BLR is the only avenue to curb inflation. So, BLR will go up in tandem with inflation.

MIDF predicts bank overnite rate will go up another 0.5% - 0.75% in 2011.

 
April 12, 2011 at 4:20 PMLoversCharm

In fact theoretically OPR is the interest rate to curb inflation, I don't deny BLR will increase because of the interest margin which banks will like to revise to maintain their profit margin. However, at the current moment(2 years till today), banks are competing to grow their loan book which is why they are giving BLR-2.2% or BLR-2.3%. This didn't happen 3 years ago where housing loans are packaged to be BLR+x%.

This implies:
1. Banks are desperate to churn excess liquidity into their loan book i.e. turn liabilities to assets
2. You (loan purchasers) are low risk as implied by the margin of finance given.

However, The most interesting point to note about how the interaction between crisis period and government policies has changed from 1997. During the 97' crisis, exchange rate was the top priority as compared to inflation. Therefore OPR levels has increased to increase the exchange rate based on interest rate differential theory. http://en.wikipedia.org/wiki/Economy_of_Malaysia

Comparatively, now what happened in the US mortgage crisis should be more relevant reference in our scenario because US has experienced asset bubble burst since ages ago? e.g. DotCom? now Credit Crisis. However, the differences in this crisis and the past crisis is that this involes REAL ESTATE which compose of US bank's TOXIC assets! How come? Because when the property price dips and you try to sell, it's PROPERTY i.e. illiquidity risk + credit "time bomb" game.

Therefore, when the property bubble were to burse in Malaysia, BLR will not rise because it is in BNM's interest to keep rates low to allow for credit to clean the bank's balance sheet. This is similarly what the US is trying to do!!! However, in US's case, there's property oversupply forces which credit cannot solve! So, strategy for real-home buyers? I'd say don't buy any property at over-inflated price right now. Despite it's a seller's market, but to-date how many sub-sales had been transacted after you receive your CF? With developer's price at market price, i.e. reaping all the profits from one group of people which thinks that they can reap off another group of people... cycle continues as if property demand is hot! So, in order to reverse the situation, some people have to lose... buyers don't get burn, let the speculators get burn. Remember, property can be a "Credit Time Bomb", which explains the symptoms of auctions and defaults occuring nowadays.

 
April 19, 2011 at 10:55 PMAndrew

Thinking out of the box are things like - building a fast efficient MRT from Penang to Kulim and Sungai Petani. Building world class amenities along these lines. Copy what makes Penang Island desirable and Paste on these places. So that people are willing to live further out where homes are 1/3 the prices in Penang. And they can still reach Penang in 30 minutes if they want it. Prices are high because they are more demand than supply. Make desirable homes abundant!

 
April 19, 2011 at 11:28 PMFence

Well it is not impossible (given both Pakatan states) but the question is funding. If this idea seems to benefits Kedah more then can they afford to fund a perhaps ~RM5 to 10billion project? Even if they suddenly have this $$$, they need to know the ROI?

 
April 20, 2011 at 8:54 PMAndrew

How about private funding for the MRT? If its profitable, they will come. Other than that , living on the mainland now is not as bad as most people think. There are hypermarkets, good cheap restaurants. Cheaper services (car repair, hair cut, etc). Schools also not bad. Maybe the govt can promote more university campuses or private schools and colleges on the mainland. Malls are coming up like the one in Sunway Seberang Jaya.