There has been some concern in recent months over an imminent real estate bubble in Malaysia. How real is this threat or is it merely confi ned to a few hot spots?
Concerns over whether the local housing market is overheating and will lead to an asset bubble are raising questions on whether there is a need for more tightening measures to curb speculative buying and ensure the market stays sustainable.
The local housing market has not “hit the roof” like in some places in the region such as in Hong Kong, Shanghai and Singapore which have recorded sharp price jumps of 40% to 60% since last year.
Nevertheless, prices of landed houses in some popular areas in the Klang Valley, Penang and Johor have appreciated by 10% to 30% over the past six to eight months. Bank Negara is keeping a close watch on the mortgage loan market and is engaging with bankers on whether tightening measures such as capping the loan-to-value ratio (LVR) at 80% should be introduced. It will be unlikely that the central bank will impose the mortgage loan limit across the board but the measure will most likely be targeted at the critical sectors, such as the upper medium to high-end landed residential sector and non-owner occupied houses.
Purchasers who own multiple properties may also be subject to the new loan limit if it is implemented.
The RPGT factor
Industry observers say another measure at the Government’s disposal is raising the quantum of real property gains tax (RPGT), which is currently at 5% for all property sold within the first five years of purchase.
The Government has tweaked the RPGT on various occasions depending on market conditions.
From April 2007 until it was reintroduced in January this year, all gains from property transactions have been exempted from the tax. The exemption was granted as a support measure to reverse the flagging property sales during the market downturn.
Under Budget 2010, the RPGT was brought back in January, albeit at 5% for all property sold within the first five years of purchase.
If the Government decides to reintroduce the RPGT in its entirety, property speculators will get the brunt of the “axe” as gains from property sales within the first five years of purchase will be subjected to a tax of 5% to 30%.
The maximum 30% is for disposal within the first two years; 20% within the third year; 15% within the fourth year and 5% within the fifth year. Profits earned from disposal in the sixth year and beyond will not be taxed.
How far the Government will go on tightening the noose on mortgage loans and the RPGT is still left to be seen. But some changes can be expected in the horizon if price increases become more prevalent and broad-based.
Consumer and industry groups are concerned that if the tightening measures are introduced, they will impact the affordability of property buyers and market sentiment.
Usually if a market is flushed with speculative buying and a bubble is imminent, property prices will spike sharply across the board of a certain market within a short time like what is happening in a number of countries in the region today.
A case in point – a 26-year-old government-built apartment of 420 sq ft in the Sham Shui Po area of Kowloon district was transacted at HK$1.98mil, or HK$4,714 per sq ft.
Fuelled by high liquidity and record low mortgage rates, Hong Kong, China and Singapore have implemented tightening measures to clamp down on property speculators as risk heightens that the sharp escalation of property prices will result in a market collapse if the bubble burst.
Reason for concern?
Is Malaysia facing a similar risk and is there worry of an imminent overheating or bubble?
Real Estate and Housing Developers’ Association (Rehda) president Datuk Michael Yam discounts the possibility of overheating or an asset bubble in the local market.
“We believe the steep price increases are only reported in scattered locations in the Kuala Lumpur City Centre and some landed housing projects in the Greater Kuala Lumpur area. This does not represent a bubble but more of a short-term deviation from fundamentals that are due to isolated speculative activities in some areas.
“Generally, the local property industry is chugging along at an even keel. We believe that prices are already peaking, and we are neither hot nor cold. The recent spurt in prices may be due to the effect of the earlier stimulus package and liquidity but that has stabilised and a plateau has been formed,” he relates to StarBizWeek.
Yam says that unless there are government incentives, there is generally no excitement or broad-based stimulation in property activities. For an increase in activities, the impact of the Economic Transformation Programme, Government Transformation Programme and the NKEAs and even Malaysia Property Incorporated as major catalysts has to come in.
“Landed terrace and semi-detached houses have seen big capital appreciation due to the limited stock available and future supply especially in prime locations. As a consequence, prices of current stock in strategic areas of Medan Damansara, Bangsar, Sri Hartamas, Bandar Utama and even new launches at Desa Park City are at or above the RM1mil mark for a double or 3-storey terrace house.
“However, one must appreciate that the price a house commands (other than its location) is dependent on its built-up, specifications, value added renovation and unique features not normally available in a standard offering,” he points out.
Tackling structural issues
Yam says the industry and the Government need to accelerate supply and also review the causes and hurdles that either impede or slow down the delivery process. Areas that need to be examined include the cost of doing business and the efficiency and subsidies that affect delivery to avoid overheating due to pent-up demand.
He disagrees with new tightening measures. “As it is, the market is not exactly buoyant and is only driven predominantly by owner occupiers. Any additional regulations such as higher RPGT, capping loan amounts and imposing higher deposits, or increasing the cost of housing delivery such as making the build-then-sell system compulsory would be a disincentive to the industry,” he stresses.
Malaysia Property Inc chief executive officer Kumar Tharmalingam says the issue of a bubble is being overblown.
“A single swallow does not make a summer. There may be certain projects fetching premium values or prices for their products, but it is not representative of the overall market.
“Our data shows values are rising in the Klang Valley but they are within specific locations and projects sought by a special brand of investors who want exclusivity. The strong buying interest is not across the board but is mainly centred in the high growth markets of the Klang Valley, Penang and Johor,” he adds.
Kumar says concerns that the potential slowdown in the West will affect the local market are also overrated.
“Our banks are strong and have not buckled even during the global financial crisis in 2007/8. We have systems in banks that keep on fine-tuning the loan to equity ratio depending on the earning capacity of the borrower. Bank Negara is watching the situation and will call in loan to value ratios to change if the situation warrants.
“Our property purchase system from a primary developer is probably the most seamless in Asia. All the necessary checks and balances are built into place by the developers, bankers and solicitors to make sure that the developers have the right purchaser who has the necessary finances and affordability to purchase the property,” he says.
An imminent uptrend?
Meanwhile, developers are monitoring the sale of their products daily and any signs of weakness in the market will be felt by them “since they stand to lose the most if the buyer pays a deposit and walks away from the purchase later,” Kumar adds.
According to Mah Sing Group Bhd group managing director and chief executive Tan Sri Leong Hoy Kum, the property market is still in the early to mid-phase of an upcycle.
“We do not see a strong risk of a property bubble happening yet and there is no sign of overheating. The price increase in properties has not been broad-based, but demand driven and rather selectively in prime locations.”
Leong says certain locations and types of products are more resilient in terms of demand, capital appreciation and value preservation.
“A healthy property market is good for the economy and quality properties in prime locations are deemed to provide a good hedge against inflation. Barring any external shocks, we are cautiously optimistic that the property market should continue to do well in the short and medium term,” Leong says.
Kumar concurs with Yam that the Government’s stimulus packages are only filtering into the system now and are creating greater confidence and interest in the property market.
“There are not enough viable investment instruments around and that’s why investors are rushing to buy property. Generally, our financial market still lacks depth such as good financial planners and advisors on investment opportunities. There is still a preference for solid and secure investment instruments like property,” he adds.
Kumar says developers will slow down on their launches as they do not want a property overhang of unsold units.
“Over the next few years we are going to see smaller launches in the Klang Valley as our property market consolidates and developers are going to release property in batches to test the market.
“Developers are venturing into niche products with better quality finishings and designs, as buyers want the least fuss these days. This has driven developers to go into higher value residences,” he concludes. - By Angie Ng (The Star)