August 24, 2011

The music will stop

I would like to share an article that I came across regarding the madness of property prices in Malaysia currently. As more and more property launches come with exorbitant prices that are beyond the income level of many workers particularly in key cities of Klang Valley, Penang and Johor Bahru, my gut feeling is that the property market is in a bubble stage and might see some softening moving forward.

So, for those who are highly leveraged with housing loans, do have a good read on the article and reflect on what the writer who has seen the ups and downs of property cycles is saying.

Costs are going up, land prices are escalating. Surely Penang house prices will move in tandem? Yes and no.

It is true that developers are now improving on design, concept, finishes and quality in order to achieve better selling prices and quicker sales. However, as in all big ticket items, there will come a time when the consumer says “I can’t afford it” or “it’s just too pricey now”.

Surely, we are not at that stage yet, are we? The ingredients have been right for a property price boom; recovering economy, inflation making property a suitable hedge, low interest rates and a very compliant lending policy for housing loans. Low property gains tax and a rising market have made investing and speculation in the property sector very profitable, both on paper and realised.

The danger is taking for granted that the “Goldilocks” scenario will continue for an extended period. It certainly won’t be. Again, rising prices bring out supply, draw sellers out and as much as we hope it won’t happen, increase the temptation for a change in policy or legislation. All or some of these can be a dampener, or worse, ingredients souring up big time at the same time. It has happened before and most certainly it will happen again. When it does is anybody’s guess. The music will stop and we will be left to see who ends up holding the baby.

Property should always be looked upon as a long-term holding, simply because that’s the nature of the development business. It takes time to buy land, get approvals and build. Most importantly, a family needs a roof over their heads. While interest rates are low and loan tenures are now very long it is easier to look at a house, which before the recent price rises, would have been beyond the reach of many.

It would be unwise to presume upon the future, that interest rates will always be low, our pay packet will continue to rise and banks will continue to be accommodating. As the world becomes more interconnected financially and economically, the only certainty is uncertainty. Uncertainty in whether scandals will arise, corporates get into a financial quagmire or countries become technically insolvent. It is not that long ago that Dubai property developers had to be bailed out, huge numbers of defaults happened on both commercial and residential purchases. We see the same for the Eastern Europe property sector after rapid price escalation, ditto for the Spanish and Irish sectors.

A roof over our heads is what matters, and what is in excess we should invest wisely and for the long term. It doesn’t mean that just because banks are keen to lend, one should borrow to the hilt. Generally for equities, bonds or businesses, there is a certain percentage of lending against the security. No doubt loans against residential property are low risk but lending has in recent times been at levels never seen before in this country, reminiscent of what happened in the US before the last economic crisis. Does that indicate something?

It is best to live within your means, be safe and sure rather than to keep chasing the pot of gold at the end of the rainbow. The day of reckoning will surely come for all of us. Are we ready when our music stops? Make sure your house and finances are on a firm foundation, the solid rock.

Datuk Jerry Chan is chairman of the Real Estate Housing Developers’ Association, Penang branch.

Source: TheEdge Financial Daily

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