Reasons for this perceived bubble

While much of the Western world today continues to suffer the effects of the global financial crisis of 2008/09, Asia has moved on. It is probably in this process of moving on that there is much concern about the property prices today, as seen in several readers writing in calling for curbs to speculation.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng says prices began to rise during the second half of last year but surge the first half of this year, particularly for landed units.

Although the 1998 Asian Financial Crisis took its toll on the Malaysian property sector, the sector was not affected by the 2008/09 global crisis.

“Our main concern today is the escalation in property prices. We do not see an economy-wide bubble. It is location specific. If the situation persists, it will have a spillover effect on the broader market segment. The effect is more noticeable in Penang, although certain locations in Kuala Lumpur are also affected. The double-digit growth may be sustainable for a year or two, but if it continues, there is the high likelihood that we will experience a bubble,” says Yeah.

Yeah’s views are echoed by property consultancy Khong & Jaafar Sdn Bhd managing director Elvin Fernandez.

“For a number of years after the Asian Financial Crisis, house prices hovered at about four times our annual household income. In some countries, it is three times. When prices increase six to seven times the household income, that is known as a bubble. In the last six months or so, there are a few locations where prices have started to run up. It is still not alarming as it has not yet affected the entire market.”

Both Yeah and Fernandez also concur that there are two key factors which are supporting this sharp run-up on prices – low interest and easy credit financing.

Prior to this sharp run-up on prices, the middle income group could afford a certain type of housing, in a certain location. Of late, the group discovers that this has gone beyond their reach.

At the same time, the number of people in the high-income bracket has also increased and their strong purchasing power has enabled them to snap up properties as an investment asset.

“Both these factors were present last year because of the counter measures taken by the Government to stimulate domestic demand.

“This has resulted in a boost in demand and the rush to buy in anticipation that prices will go up.

“Fundamentally, one may think it is not affordable but the expectation of higher prices stays with speculators. And the market becomes frothy,” says Yeah.

When prices go beyond fundamentals – an overshot in prices – rental yield is affected. If this situation is confided to selected schemes, the negative impact is limited. It is the high income bracket that will be affected.

A reasonable rental return is 3% to 5% nett depending on the type of house. But with various new areas coming up, yield has gone to 2% or below.

“These are dangerous levels from the household income perspective and also from the rental perspective,” says Fernandez.

Added to that is speculation, with some people buying five to 10 houses in one go, says Fernandez. The 5/95 schemes and other variants of it, where you pay RM2,000 to RM3,000 and need not pay anything until the property is completed, is an invitation to speculate.

Speculation, says Yeah, is another of RAM’s other concern as this is likely to affect non-performing loans (NPLs).

“At this point in time, the latest figures show that NPLs have not increased. That is one of the arguments that there is no bubble. What banks need to do is to ensure that lending is not generating speculation,” says Yeah.

The total exposure of banks to the property sector is about 40% in terms of mortgages and lending for construction loans.

By The Star