Wednesday, April 28, 2010

Properties - Any more room for growth?

Malaysians who invested in residential properties (landed especially) would probably be laughing their way to the bank over the last 10 years of their investments - especially those in the Klang Valley, Johor and Penang. For example, a Bandar Utama 2-storey link house which was sold for RM250k - RM300k is currently selling for RM650k to RM700k, a decent >100% increase in value not to include the rental income. There are many more examples that others may highlight to me which may see even better increase in value.

I would put the increase in property value to be due to the following factors:

- interest rates - I remember when I started work during the 90s, interest rates were at range of between 9% to 12%. Now banks are offering rates at below 2% BLR - something which would have been unheard of few years ago. Today, house owners are enjoying rates of 4% effective. Problem is would this sustain? I do not think so. Today's banks are concentrating on lending for consumption which includes credit cards, housing and cars. While this may be positive for the public, it may not be good for the future of Malaysia as lending to commercial sectors are not preferred as compared to personal loan. (This is the reason why Public Bank is doing well over the last 10 years);

- easy access to credit for properties - banks are more keen to lend for properties than anything else which was also why last year in 2009, we see that financial institutions were competing for loans by undercutting each other in providing lower rates;

- longer loan tenure - remember 20 years ago when loan was for 15 years max, but today literally banks are allowing loans to be extended to 30 to 40 years which means they are probably asking your children to be pay your loan, days when you are already not having any active income;

- Malaysians have less area to invest - unlike the 90s, Malaysians today are keener to invest in properties as investment elsewhere does not guarantee positive (or as much) return as compared to properties. Stocks are not doing much headway. For example, the KLCI was hovering around 1200 - 1300 in 1996, it is pretty much the same today. What more the index is to a certain extent rigged by EPF's involvement in the market. FD rates are also very low.

- urbanization of the work force - this factor will be one of the factor that will continue to cause property prices in the urban areas to rise at above average rate.

- mentality of do not want to lose out - it is quite surprising to me that a piece of bungalow land at Setia Eco Park is selling at RM80 - RM100 per sq ft. It is next to Klang but hey to many if you do not buy now, you will never be able to afford anymore, that's the mentality of most property owners - herd.

With the above, will we see properties to continue to enjoy such boom? I doubt so as I do not think interest rates (one of the main factor) to remain this low over time. Additionally how much more can we extend the loan tenure 50 - 60 years (totally ridiculous).

The rise of properties is also dependent on the success of Malaysian economy. For the next 10 years, I do not think Malaysia will enjoy a continuous economic growth of 8% for more than 10 years.

With further increase, will Malaysian be able to afford anymore? I think it is tough, and I also feel that anymore substantial increase would be unhealthy for people here.

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