House prices: Bubble may burst soon



While there is a great deal of concern by Malaysians about the significant increase in food prices in recent months, there is an even greater concern: the rise in house prices.

This is especially so in George Town, Petaling Jaya, Shah Alam and Kuala Lumpur.

In the last three years, there have been spectacular rises in prices of landed properties. In one suburb in the north of Kuala Lumpur, new residential property prices for link houses surpassed RM1 million.

There is truth in the National House Buyers Association's statement that the astronomical increase in house prices (old and new) in Penang, Petaling Jaya and Kuala Lumpur prevents an entire generation of young adults from buying houses.

The reasons for the rapid increase in house prices include easy availability of bank loans with low interest rates, easy payment schemes and low real property gains tax of five per cent for gains on sale of properties.

In some cases, developers' staff book properties and these change hands for a fee.

Many developers raise property prices with the excuse that the cost of labour and materials rises rapidly.

Developers contribute to the rise in house prices.

While one cannot deny that labour and material costs will rise, the extent of the rise is much lower than the rise in house prices.

The developers' prices are not justified.

Developers argue that they have holding costs and other risks associated with the business, but look at their annual profits from the sale of properties.

It is obvious that many big developers show healthy profits as, more often than not, the launches in cities are sold out within days.

The authorities need to look into this aspect of house prices in relation to the cost of labour and materials.

With the anticipated introduction of the goods and services tax, the price of properties will be higher, as developers will transfer this cost to buyers. Genuine buyers will bear the spiralling cost.

Another aspect is speculation on property prices.

Developers recently were clamouring for the government to reduce or exempt house buyers from the real property gains tax, which used to range between zero and 30 per cent, depending on the number of years of ownership, as well as a reduction in stamp duties.

The developers' argument was that because of the overhang of properties, they were unable to make sales and suffered losses.

The government then reduced the real property gains tax to five per cent for gains on properties sold within five years of purchase and zero per cent for those sold thereafter.

In the process, it gave away revenue it ought to have collected. Now look at the effects of that decision.

While I do not deny that there are pockets of unsold properties, many developers and speculators make big profits.

It is genuine house buyers who are locked out of the process.

Banks, too, contribute to this phenomenon and Bank Negara should deal with this before the bubble bursts.

The government should review the Real Property Gains Tax Act and even the Stamp Act (like in Singapore and Hong Kong) to deal with speculators.

Many speculators buy and sell properties in a short period of time and the government should consider instituting legislation to stop this.

The previous real property gains tax of 30 per cent should be brought back to tax all profits made from the sale or transfer of ownership of properties within three years.

This will discourage speculators, many of whom do not have the capacity to even put in a 20 to 30 per cent down payment on the purchase price.

Bank Negara should tighten the availability of credit, especially for those buying a second or third house. Perhaps, stamp duty should also be imposed on those who sell their properties within two years of purchase.

Prevention is better than cure. While there may not appear to be a bubble in sight, as claimed by industry players, it may be too late when it bursts and the authorities are left to clean up the mess.

Prices of properties have to be monitored and checked in relation to financial measures, such as the level of loan versus buyers' profiles and number of properties bought or sold.

First-time home owners are the hardest hit and our children will find it hard to own a house if the government does not act now. - By R.C.C., Kuala Lumpur (New Straits Times)

27 comments:

May 6, 2011 at 4:49 PM kucing said...

After reading so many experts lining up to comment that the property prices will go higher, now we at least read something more sensible and realistic !

As most so-called "experts" are invited (and paid) by developers to give opinions, what do you expect them to say ? If they said bubble will burst soon, then who is going to buy properties from those greedy & cunning developers ?

I believe property is due for a mild correction this year (drop 10-20%, maybe) so for those can wait, wait for it to burst then only buy at cheap !!

 
May 6, 2011 at 6:11 PM jack1981 said...

There will be a price drop, very much depending on location will happen after thousands of speculators rush in to buy/speculate properties without studying the fundamental.

For me, anytime is good time to buy properties, whether crisis or not, hence serious investor don't be afraid to invest more properties. I feel sorry for the speculators.

 
May 6, 2011 at 8:34 PM alan said...

Bank Negara just oncrease the overnite rate from 2.75% to 3.00%.

So, BLR will go up in tandem in another few days.

It is not easy to find buy for any condo >500K and terrace >800K.

In addition, the rental return in Penang is suck.

 
May 6, 2011 at 10:01 PM tan said...

If you plan to buy any property, it is advisable for you to factor in some buffer on the interest rate.

You need to take the current rate +0.5% because many analysts are expecting another hike in 2nd half of this year.

 
May 7, 2011 at 3:16 AM pockaroo said...

Bank Negara acknowleged the average household debt level shot to 76% in 2010. Add food price inflation, more money spent on food and basics, less disposable income.

Add extremely loose monetary policies on part of BN - low interest rate environment and easy credit, 5/95 or 10/90 loans that banks ever so eager to make out.

Add the Budget 2011 100% loan for first time buyers. Shocking even that the government is making it easy for low income first time buyers to leverage 100% debt just to own a first time home.

Add every property developer and his dog hyping about rising materials costs and land costs.

Add the fact that your wages and salaries certainly had not gone up anything close to 50% while property prices shot up 100% in the last 3 years for areas like KL, Penang, PJ.

Bubble or not, prices can still increase further before a severe correction kicks in. That can only happen when no greater fool out there can afford or be prepared to pay such prices. Economics 101. Demand/supply, willing buyer/willing seller.

 
May 7, 2011 at 8:10 AM Dr. said...

Yea, property price increases all the times. This is old news. Burst? It's highly not likely - banks are still very strict in lending money & many richies out there buying with reserved cash.

 
May 7, 2011 at 11:19 AM MyAstro said...

Can anyone show an example of property bubble burst in the history of Malaysia after 1957 in a good location ?

 
May 7, 2011 at 1:22 PM Yellow said...

let's goreng

 
May 7, 2011 at 2:34 PM HelloHello said...

Agree with jz & pockaroo, simple living is the best choice to go, Cash will be king, so its always better to keep more cash then paying interest and debt.

I could see housing price increase by the weeks nowadays with similar unit.. which are atrocious!!!!

 
May 7, 2011 at 5:17 PM condomana said...

Finally, an article that is simple, easy to understand, truthful, factual and most of all, makes sense. It pretty much sums up the reasons behind the "baffling" property price increase that we see recently.

The increase in OPR & SRR ( if not sure about these terms, please refer to 5 May 2011 STAR news about the increase of OPR & SRR by Bank Negara) shows the concern of Bank Negara about the irrational increase in property prices that might eventually cause instability in our financial system. This further underpins my opinion that the demand for properties is not real, but liquidity (therefore speculative)driven.

Acknowleging this problem is a big step forward in the right direction for the regulators. At least they won't say stupid things like "property prices in Malaysia are still under control because if you compare the price here, it is still much cheaper compared regionally" again.

Dear jack1981,

Please forgive my ignorance. May I know what is the difference between "serious investor who invest in more properties" and "speculators"? As per definition in dictionary, a property speculator means - someone who buys properties not for own use, but hoping to make a profit when they sell them.

Dear alan,

It is not easy to find buyers for properties in Penang anyhow, and you are right, rental returns in Penang sucks, and it sucks really hard especially for landed properties. Why? Because all those landed properties have been grossly over-priced.

 
May 7, 2011 at 5:35 PM condomana said...

Dear Dr,

Property prices do not increase all the time. Property prices do always increase over the long term. These 2 are totally different things.

Banks are strict in lending? Not true for mortgages, only true for business lending. That probably explains why Malaysia household debts is amongst the highest in the world.

Dear MyAstro,

I bought a condo in Penang (Pulau Tikus) for RM450,000 in year 1999, of which similar units were transacted at around RM650,000 just before the Asian financial crisis. This is an example of property bubble burst in the history of Malaysia after 1957 in a good location...:)

 
May 7, 2011 at 8:19 PM jack1981 said...

Just my 2 cents opinion,
Serious investor does not flip. They study fundamental, including location, ROR, management performance, future forcast and etc... Usually buy under market rate from "motivated seller" and rent it for positive cash flow.

Of course there will not be a standard answer to define serious investor. It is up to you.

 
May 7, 2011 at 11:13 PM Jan said...

You don't need to own something in order to have something. while everyone is buying, you just rent it. especially the rental yield for Malaysia property sucks big time:)

When people buy, you sell to them
When people buy, you rent from them

For example:
RM350k condo in penang for sale, monthly repayment = RM1600/+-

RM350k condo in penang for rent = RM900

Enough said.

Bubble please come soonest

 
May 7, 2011 at 11:15 PM Tasha chng said...

sometime i think the property agent also play a role in pushing up the price. i do notice there is a unit in prestige height which intially is rm590k... a month later the price increase to rm600 then now become rm630k.. every month increase rm5k.. crazy la..

 
May 8, 2011 at 12:22 AM condomana said...

Dear Jan,

You are very smart in terms of ringgit and sen. But the mentality of a M'sian is (especially a Penangite) you feel proud when you tell someone that you actually "OWN" this piece of nice property. You feel even prouder when this property you bought has gone up in price. You feel "super" proud when you OWN a second property, you feel "ultra" proud when the price of this 2nd property has gone up. You feel "mega" proud when the 3rd one is work-in-progress!! And there is this BIG negative stigma with renting (which implies you actually cannot afford to buy), although it makes lots of sense.

Dear Tasha chng,

Property agents are not the only culprits. Agents alone can't do much, if not for the irresponsible statements made by developers, deputy ministers and the so-called property experts etc that you read in newspapers about how much and how soon property prices are expected to go up due to rising material costs.

Please go to the link below to read about Unilever (a multi-billion British-Dutch company) getting fined for talking to Chinese media about possible price hikes that triggered a rush to buy while Beijing is trying to rein in surging inflation.

http://www.businessweek.com/ap/financialnews/D9N1PTO00.htm

And as recent as 2 weeks ago, our deputy finance minister actually said "Malaysian property prices are expected to increase at an average of between 10% to 20% this year, in light of rising inflation and increase in demand ..........", if this is not "spreading information about price rises and disrupting market pricing order", tell me what it is. He is unfit to be our deputy finance minister.

 
May 8, 2011 at 1:06 AM JO said...

Every one has different investment profile. Investment in property today is just like betting 'BANKER' or 'PLAYER' in genting.

Some high risk taker, when they smell the opportunity in property market, they jump in immediately, buy high and sell higher. Touch and go with 20% return in 1 year. Who care bubble burst or not burst. They are very risky.

Some low risk taker, when market is high, they just wait. When market is low, they just watch. After many years there is no action. For sure this group of people (conservative type) will be very secure, no risk and very peaceful for the whole life.

 
May 8, 2011 at 7:20 AM MyAstro said...

Hi Condomana,

May I know the name of the condo? Need to learn from this case. "Greanlane" and "Lumba Kuda" are the middle class areas after the Pulau Tikus, might happen the same drop as your case. I believe landed in Pulau Tikus has no similar "bubble" right?
I am quite confident in the condo around QB and landed in SPI and SB. But demand change so need to let go at the right time.

 
May 8, 2011 at 2:43 PM alexenjoylive said...

penang property especially condo will end up burst till the max when the bubble burst. Pearl Regency, Platino, Elite 1 2 3 4 5 la, one residence la, golden what triangle la, lets face it, supply more than demand already, still go and listen to the price gonna increase this kind of news. Spending 500-600K for a condo 1300 sqft? Think twice man, think like condomama.

 
May 9, 2011 at 1:51 PM condomana said...

Dear HelloHello,

If simple living is the best choice, then what's the use of keeping so much cash?...;)

Malaysia is blessed with plenty of land which enabled the formation of many tiers of cities/towns. If you dread the rat-race of tier-1 city like KL, you can come to Penang (tier-2). If not happy can go butterworth (tier-3) with more options of tier-4 (kulim) or tier-5 (kuala ketil) and many tiers down!! The lower tier you go, the cheaper the properties & living costs are. You go down tier-9, I believe you can't even find a bank in the "town" - "town" as in the hut under the coconut tree, land is probably free, you don't have to worry about mortgage, interest & debts...:)

Welcome to Madagascar.......I like to move it move it....:)

 
May 12, 2011 at 3:41 PM Ng said...

House buyers group says developers’ greed behind high prices - The Malaysian Insider

The rapid rise in house prices has put home ownership beyond the reach of a
whole generation of young adults, says the HBA.

KUALA LUMPUR, May 12 — The National House Buyers Association (HBA) says greedy
developers are behind rising property prices that put housing out of the reach
of many, dismissing a host of reasons given by industry to justify pricing
levels.

Real Estate and Housing Developers Association (Rehda) president Datuk Michael
Yam had denied developers were to blame for increasingly unaffordable property,
attributing it to high land prices, social responsibility obligations and
“indirect taxes”.

But HBA secretary-general Chang Kim Loong said the social responsibilities such
as building low-cost houses and reserving Bumiputera quotas that Yam mentioned
have been in existence for years and were nothing new.

Our argument is about the current phenomena of unbridled escalation of house
prices that bears serious adverse repercussions to the rakyat,” he said,
responding to Yam’s remarks.
“To justify the mad escalation of house prices by bringing in arguments about these decades-old social responsibilities is to be
out of sync.”

Chang also cast doubt on the low profitability of developers as claimed by Yam,
saying that developers were free to exit the industry if it was so difficult.

Yam had cited the example of property giant SP Setia which reported full
financial year 2010 net profit of RM251.8 million, representing about 14 per
cent of its revenue of RM1.7 billion, which he said was not a very attractive
margin.

“We are in no position to comment on the accounting principles of SP Setia but
taking Yam’s words, a net profit of 14 per cent is still a very attractive
profit!” said Chang. “But then again, if the profit margin is low, they are at
liberty to venture into greener pastures.”
He also tackled the issue of high land cost, saying that it was a question of
chicken and egg.

“Landowners, of course, look at the prevailing prices of properties before they
demand what they think should be the market price,” he said. “Property valuers’
role also comes into play, hence our statement about the unholy alliance. If
existing property prices have not been pushed up so much, then landowners would
similarly not demand such high prices for their land.”

Yam had told The Malaysian Insider that the issue of high property prices needed
to be looked at holistically but Chang insisted that some “wayward” industry
players acting within an “unholy alliance” were responsible for the situation
due to the urge to lock in as much profit as possible.

“Whichever way one looks at it, holistically or otherwise, in a situation of a
seller’s market, it is always the industry players who set the market mood,” he
said. “This applies across the board of all trading activities. In the case of
the property market, the main players are the ones mentioned in the article.

Each party has the common objective of cashing in on the prevailing situation to
reap as much profit as possible within legal boundaries, and sometimes even
beyond, if the likelihood of getting away with it is good.”

 
May 12, 2011 at 3:55 PM Ng said...

House buyers group says developers’ greed behind high prices - The Malaysian Insider

The HBA secretary-general said the border between greed and profit was often
hazy and profitability often overlaps with greed in hot market situations.

“Again, we would put it that developers are more interested in huge profits
rather than social responsibilities.

Thus they stack upwards and build pigeon
holes rather than conducive housing,” he said.

He admitted, however, that there were also some developers and bankers who were
acting responsibly.

On Yam’s assertion that a re-introduction of the full real property gains tax
(RPGT) after it was suspended would deter foreign investors and be taken as more
government policy inconsistency, Chang said: “We like to see it as the prompt
reaction of a responsible and caring government.”

He said, however, he sympathised with Rehda over “indirect taxation” which came
in the form of developers having to build public utility infrastructure which
added to the cost of residential property.

“We too have lobbied for such infrastructures to be carried by the respective
public-listed utility companies because they are business ventures,” he said.

“But having said that we are also apprehensive as to whether such savings would
be passed to house buyers or simply go towards padding up developers’ profits!”

Property prices in urban areas such as Penang and Kuala Lumpur rose by up to 40
per cent last year fuelled by low interest rates and a surge in speculative
buying.

The average price of a KL residential property is now about RM485,000, or
roughly nine times the average urban household annual income of about RM54,000.
The Demographia International Housing Affordability Survey rates markets, whose
property prices are 5.1 times median income or more, as “severely unaffordable”.

Chang said the rapid inflation of assets risks putting house ownership beyond
the reach of a whole generation of young adults.

 
May 12, 2011 at 11:27 PM HelloHello said...

Dear Condom-anal,seems like you r truly illy addicted by property speculating in penang. So sad of people like you that can't even live a simple life even with alot of cash.

May your dreams of living in a complicated stressful life forever come trues. So what if one wish to stay in KL or penang and still whining and whining of overpricing property? U wana live your own stupid way of complicated life then please go ahead and stop ur stupid insult of other wish to live a simple life....Wat an arse...!! Truly condom-anal-----

 
June 1, 2011 at 9:49 PM Live Long MU Fan said...

Dear CondoMama,
May I know what is the price today of the condo you bought at Pulau Tikus after the crash?

 
July 22, 2011 at 1:31 PM Anonymous said...

The bubble MUST burst! The people of Penang MUST be able to afford a home of their own. Most projects are luxury homes targeted for people who come from the outside. Where do we live then? Rent homes till we die? Oh wait, our landlords may want us to have our deaths elsewhere because if we die in their homes, they may not get new tennants!

 
July 22, 2011 at 4:00 PM propng said...

If the property market really burst, price would go down tremendusly that's true, but not to forget bank bad-debt would increase, under-construction project would be halted, and BLR would possibly increase to >10% (with ++) like what we had in 1997/1998 economic crisis. At that time I don't think you would buy any house anyway as a 200k property would cost you >RM3000 monthly installment. So be practical, work harder, built up saving, and buy one of your dream home which within your affordability.

 
July 22, 2011 at 5:45 PM ChampDog said...

Talking about affordability, I think they're a lot of luxury people too in Penang too. Thus, they are afford to buy. Don't you guys think so?

 
July 22, 2011 at 8:19 PM strata management company said...

Yes house prices can be burst at any day but it is also true, everyone wants to buy or have their own home and they are ready to save and spend much amount for house.