By Khairul Khalid
Malaysia’s property industry is at a crossroads. There is a growing clamour by property developers to ease government’s curbing policies, primarily to jumpstart a sluggish market, although there are fears that relaxing them too soon could cause property prices to spiral out of control again.
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When is the right time to loosen the leash of government’s cooling measures that has slowed down the property market, and could this lead to another property bubble?
A property bubble is usually caused by demand and speculation leading to what economists term “irrational exuberance” of investors and speculators, driving prices up to levels that aren’t necessarily sustainable or supported by fundamentals.
Thong Mun Wai
According to Thong Mun Wai, the Head of Agribusiness, Real Estate and Construction at RAM Ratings agency, the government curbs would likely be removed eventually, although it is not clear when just yet.
“Cooling measures are usually periodically reviewed by governments and relaxed or removed when they have achieved the desired effects. As such, we do not think that these initiatives will go on indefinitely,” said Thong to KINIBIZ.
Thong also said that although the market is relatively subdued this year, prices could begin to escalate again next year, if the market recovers.
He confirms that cooling initiatives have dampened buying activity within the local residential property market. The number of residential property transactions had contracted 10% YoY in 2013, and only inched up 0.4% last year.
“Having said that, primary market transactions rebounded 31% YoY in 2014, following a 32% decline in 2013. We believe that there is still a risk of overall volume contraction in 2015 amid the subdued market before and after the implementation of the GST. On the other hand, the market may start recovering in 2016, with a possible run-up in property prices when this happens,” said Thong.
Another property consultant James KM Tan, associate director of Raine & Horne, said that only certain segments of the market may be at risk of a bubble.
“Some sectors, especially the soho (small office/home office) and sovo (small office/virtual office) may be facing some downward movement. Those who bought for speculative purposes hoping to make a quick buck but with no holding power will be affected,” said Tan to KINIBIZ.
On the other hand, the HBA stated that although the situation is under control now, the threat of a property bubble still looms.
“Although property prices in the Klang Valley have become severely unaffordable, there are still no indicators of a property bubble as there is a lot of demand due to emerging younger population and urban migration which seems to lower the risk of a bubble. However, this does not mean that there are no pressing problems,” said KL Chang, honorary secretary-general of the HBA to KINIBIZ.
He said that a property bubble can still emerge in the Klang Valley in the event of a prolonged economic recession when too many people start to lose their jobs and are unable to service their mortgages.
“Banks will then start to auction their properties at fire sale prices and this can trigger a domino effect leading to a bursting of the bubble,” said Chang.
Chang also cited several examples outside the Klang Valley, such as the market in the Iskandar region in Johor.
“The Johor state government is reported to have frozen all new applications for service apartments as a preemptive measure but when the infamous 10,000 units launched (by China developers Country Garden) at the same time are completed and there are not enough takers, it could spark a property bubble burst for Iskandar and perhaps even the whole of Johor,” said Chang.
The HBA secretary-general also decried several marketing tactics by property developers to overcome some of the government restrictions.
For example, Chang said, after the government banned the controversial DIBS, developers became more innovative by increasing the property price and then offering a rebate of between 5% to 10% of the purchase price.
“Hence, effectively, the house buyer would need not fork out any downpayment to buy the property, although Bank Negara has officially disallowed this practice by saying that the mortgage is to be based on net price after all rebates. In practice, the stakeholders (lawyers, bankers, estate agents and buyers) seem to abet such wrongdoings,” said Chang.
Chang said that although such rebates may look like they are helping first-time house buyers or buyers who lack the cash to make the downpayment, in the long run, it does more harm than good.
“By not having to make the normal 10% downpayment, some house buyers might be encouraged to speculate as they are only required to service the interest during construction and hope to flip the property on completion. However, if the 10% downpayment is required, many speculators will be discouraged as it means having to fork out a substantial sum upfront,” said Chang.
The secretary-general of HBA explained that this artificial inflation of property prices for new launches would also have knock-on effects on the secondary market.
“The prices of new properties will in some way also determine the prices of nearby secondary properties and vice versa. Assuming that a property was only supposed to cost RM500,000, by putting an artificial price of, say, RM550,000 and then offering a rebate of, say, 10% or RM55,000, the prices of secondary properties will also increase, although not necessarily by the same amount,” said Chang.
“For subsequent launches, the developer is again forced to launch at even artificially higher prices so as not to jeopardise the interest of buyers of his previous launch. Instead of just RM600,000, the developer could be forced to price at closer to RM700,000. Developers of the neighbouring project will want to ‘up the stake’,” said Chang.
This could further push up prices of secondary properties and cause a ripple effect on prices not just in KL but even beyond the city.
At the end of the day, safeguarding buyers’ interests should be the priority. There has to be a balance struck between developing a robust and sustainable property market, while not sacrificing the rights and security of home buyers.
“Nobody can predict, least of all guarantee, the success or failure of any business venture. Housing development is no different and also subjected to such vagaries. However, house buyers need not be exposed to such business risks. They can and should be insulated from such business risks and they should not be dragged into the muddle of any failed housing projects,” said Chang, citing the need for the industry to depart from the present sell-then-build (STB, or progressive payments) system and to adopt the proposed 10-90 BTS (build-then-sell) concept that was abandoned by the current Housing Minister Abdul Rahman Dahlan.
Overall, then, there are things happening in the housing market that can potentially cause a further push upwards in house prices despite the authorities taking preemptive measures. While regulators need to keep an eagle eye on the market, responsible developers must realise they shoot themselves in the foot if they contribute to a bubble.
The problem could be that developers’ responsibilities over a project diminish once the sale is made because the risk of non-completion passes to the buyer. Thus, a BTS system where the developer bears the risk if he cannot complete the project will not only ensure he takes the trouble to finish it but it will also help ensure that the property market does not get too much out of line of fundamentals.
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