Astronomical property prices

Today it is undeniable that property price is a huge concern for the Rakyat. The trend is not isolated in Malaysia but also in many other Asian countries. The other side of the world though is having a direct opposite situation. Now what has caused this situation? As recent as a few years back, there is a huge property glut. Pages and pages of advertisements can be seen in the newspapers. Options and choices are abundant.

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”.

Developers, bankers, agents are working in cahoots for their own vested interests. Friends and families of developers are loading up units for a good trade. Speculative plays also create artificial demand and further exacerbate the situation. Most worryingly, the people who are joining the speculation are over leveraging themselves with staggering loan to income ratio. Low and prolonged interest rates has always been the most commonly quoted source. But there are many more tricks under the sleeve. Creative packaging of 5/95, no SPA, Legal Fees, no Interest during construction, which in actual fact, is priced into your exorbitant swanky new home. All these sums up to be stoking artificial demand.

Supersized terrace houses, now the trend, is selling at figures near RM1 million. Some which are located deep into Sungai Buloh but conveniently rebranded as Damansara is now fetching RM1.4 million. Owners of such product at Desa Park City is grinning to see it’s going at RM2-4 million. And they proudly justify the valuations by giving one and only reason, that there is no other places in Klang Valley that has such a concept. Condominium units recently launched yesterday near Taman Pertama is asking for RM650k. But if I remember well, the erected board there says ‘Cadangan untuk membina pangsapuri kos sederhana’. Terrace houses nested deep in Cheras is asking for RM740,000 when that area is well known for robbery and cracked houses. Strangely enough the previous launch albeit being smaller units were sold for RM390,000 only. Condominiums in Mont Kiara is asking for RM2 million now.

Affordability does not seem to be having any impact. In fact, affordability today is much more worse than the years before yet the demand seen in the market clearly defies this logic. Rental yields are now fast becoming a laughing stock. Did our income levels gone two fold recently?

All in all, clearly it is a very frothy situation. I cannot for the life of me see the sustainability for this and where the actual demand comes from.

Bank Negara has raised OPR to another 0.25% and 1% increase SRR to 3% soaking up roughly RM7 billion of liquidity. The other policy of 30% downpayment for a third property purchase is also engaged to deter speculaction. It is widely anticipated that Bank Negara will do another round of this by end of the year.

Now this means higher mortgage payments and higher cost of fund for the commercial banks. Which means people will struggle to pay their mortgage and banks will be stricter in giving out loans thereby reducing demand. When more completion is delivered and the supply hits the market, speculators will start to flip and flood the supply. High mortgage payments will also trigger some to default and increase Bank Lelongs and also an increase of supply to the market.

I would hope to see an introduction of RPGT again with progressive tax brackets.

Cash out while you still can. Don’t buy into the cost of building materials is high story. Real actual buyers has the most to lose currently. But speculators will be burned.