Sentiment, Perception & Reality Posted : on 10/3/15

Is the property market going to see a dip? Many investors and even home buyers are anticipating a downward trend. This they rationalize with the following reasons:

  • The credit squeeze. (Bank Negara’s Responsible Lending Guidelines)
  • Market Sentiment
  • Over supply of new properties in certain sectors and locations.
  • Stagnating Rental Values.

While the reasons stated above are points of concern and has its merits, one must be objective and investigate a little further before making any conclusions.

REFERENCES

A good way to further evaluate the property market would be to make references to previous situations where the property market experienced corrections or when market sentiment was generally negative.  

The property market experienced corrections in 1986, 1997 and 2008. I believe the Asian Financial Crisis in 1997 was when we were worst hit. Interest rates went through the roof and financing for properties was very difficult. However in 1999 prices recovered (especially in KL) and surpassed pre 1997 prices. From then on prices just took an upward climb until 2008 when we experienced the Global Financial Crisis.

In 2008 when the crisis hit, property prices in Malaysia were hardly affected as we Malaysians had already learnt our lesson from the financial crisis in 1997. The property markets in Europe and the US were badly affected and foreclosure of properties was an accepted norm.

Interestingly, the property prices in certain prime locations in the US (Manhattan) and the UK (London) were hardly affected. Prices did not plunge and many of the property buyers looking for good deals in these two locations were left disappointed. (This was exactly the same situation we experienced with our prime properties in the city in 1997 during the Asian Financial Crisis)

Let us now make reference to the current situation in our market. This excerpt from the recently released Property Market Report is interesting:

 

The property market activities moderated in 2013. The market registered a decrease in volume of transactions while value increased. There were 381,130 transactions worth RM 152.37 billion registered in 2013 against 427,520 transactions worth RM 142.84 billion in 2012. The volume of transactions dropped by 10.9%, but otherwise, value expanded by 6.7%.

 

The residential sub-sector retained the lion’s share in the property market, contributing 64.6% share in volume and 47.3% in value. The year registered 246,225 residential property transactions worth RM 72.06 billion  which recorded a contraction of 9.7% and an increase in value of 6.3% respectively.

 

Extract from 2014 property market report. (Released 22nd April 2014 – Jabatan   Penilaian Dan Perkhidmatan Harta)

What we notice here is that while the number of transactions dropped last year, prices of properties did not retreat. Why is this? It would be logical to make an assumption that if there was less activity in the market, prices would generally trend downwards.

This scenario where prices appreciated despite lower sales volume can be interpreted in several ways - Property owners selling their properties are not under any serious financial pressure to sell, Investors are holding back and adopting a Wait and See Approach, The recent implementation of the Responsible Lending Guidelines has deterred speculators and maybe developers are pacing themselves and cautiously moving forward with new launches thus reducing incoming supply.

All the above reasons can be interpreted in many ways and I do not profess to be an expert on this matter. However based on previous trends and the average Malaysian’s appetite for property, we can make some basic assumptions. If prices did not retreat in 2013, with the implementation of stricter lending guidelines and higher rates imposed on Real Property Gains Tax, why should it retreat in 2014?

Further to the above there are other critical factors that will also have a bearing on property prices are:

  • The availability of good development land and the escalating prices.
  • The rising cost of construction material.
  • The rising cost of labour.
  • Inflation

All the above factors will have an impact on property prices, so it is really difficult to envision prices coming off. We may see slower sales but not declining prices.

In conclusion, properties in prime locations will probably see further upside on prices in the nearer term, however one must be careful not to make references to properties which are over- priced. 

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