Wednesday, July 18, 2012

Property prices beyond reach? Think again.

During good times, banks can act as the lubricant of the economic growth of a country. If over exposed and uncontrolled, banks can also cause havoc to a country's economic health. We do not have to look too far behind - remember the sub-prime crisis in US in year 2008. Started off before Obama's presidency and now it is towards the end of his first term, until today, the housing crisis is yet unresolved.

I could not help thinking why over the last few years - in fact a year after the sub-prime crisis, why is it that the property prices in Malaysia (similarly in many other cities around Asia) jumped by leaps and bounds over a period of just 3 years. For example, I was looking at a piece of leasehold residential land in Kota Damansara - 3 years ago the price it was fetching - RM60 per sq ft, now RM150 per sq ft or even more. Now that's land, I have even heard of completed properties (especially high end) have gone up even more in terms of percentage.

Who is at fault? If you believe me, banks and developers are the biggest speculators. Are they overplaying their role here?

Let me provide you a scenario.

To get a smallish decent little new apartment of around 1,000 sq ft at the outskirt of the KL or PJ city, it would have costs at least RM350,000. You may think that it is very expensive, but try to do some calculations. For a household / person who earns say RM4,000 (now RM4,000 per household in Klang Valley, Penang of JB for that matter is not high), would the person be able to pay for a RM350,000 apartment? Let's look at the calculator provided by Maybank below.
Based on the above, the affordability level is possibly yes. As an illustration from above, for any household to buy a property worth RM350,000, his / her monthly repayment is RM1,504 assuming the interest rate is being charged at 4%. Mind you the loan is for 30 years which means for a 30 year old, he / she will have to pay until 60 years of age. He / she however will still need to fork out the downpayment of RM35,000 for 10% (as banks will only fund 90%) as well as other related fees which will probably come to another RM20,000. All in all, that is RM55,000 for just the downpayment and fees alone. Will the person be able to save up or come out with that amount? Possible. Assuming that they have saved some RM20,000 to RM30,000 and with the assistance from EPF's withdrawal for housing loan, the person may be able to manage.

(Let's not talk about renovation as some of the times, the property is for speculation.)

With the repayment that he / she has to make to the bank, what about his lifestyle - can he / she makes ends meet? With RM4,000 income, the take home will probably be around RM3,500. Deduct the loan repayment of RM1,504 - around RM2,000 will be available to pay for transport (if car, bank financing again), utilities, travel costs, food, some slight entertainment. That's tight but for anyone which has some flexibilities from credit card, some little additional claims, bonuses here and there etc., it is possible.

Now, let's look at what has made this possible? Wasn't this same thing made available by the banks 5 - 10 years ago?

Because of the Banks - Interest rates at its lowest

If you look at the BLR table below, because of the spillover effect of sub-prime, Bank Negara has caused reduction of BLR to a historical minimum 5.55%. To top off with that, because of costs of funds for banks have gone much lower, property financing rates have gone below BLR rather than above BLR which was the norm prior to this. Hence, at BLR - 2.4% or even more today for example, borrowers are able to get rates as low as 4% - 4.2%.

The lower the rate, the higher the affordability.

What about years of financing? I remember, prior to 1997, it was 20 - 25 years for maximum years of financing. After the Asian crisis, now there are banks (in fact most) which are providing property financing terms of up to 40 years.

What about developers?

Heard of the 5/95 plan? To make properties even more affordable, I have seen this plan initiated since 2008. Basically the 5/95 plan is to allow buyers to just pay for 5% downpayment for their booking and purchase. The remaining 95% will only be paid upon completion of properties. No interest will be paid during the construction.

Of course banks will still have to approve the loan as the risks of payment is still at the purchasers side. Hence, over here again the banks and developers are working together - knowingly or unknowingly in increasing the value of launches.

(This is different from the Build Then Sell concept which is highly recommended)

In essence, this has caused higher affordability level and of course even more speculations. Why? The person only needs to pay 5%, and nothing else until completion. After completion, some would expect to flip the properties hence making a quick profit out of this speculation albeit from a low upfront downpayment.

This scheme while it is helpful to the developers to sell properties, unfortunately may have caused some over excessive speculations.

Do you now believe the excessive pricing are due more to these 2 sectors rather than inflationary pressure - say oil, or material prices? Do you think that because price of property is part of the CPI, it is inflationary as well?

Now you know why in my blog, I have never covered any property companies or banks, especially now. This is because if there are any economic calamities (and I am not saying for sure there are), do run cover from these sectors fast. More often than not, we would not be able to sell fast enough. The risk for me is a little bit too high.

I couldn't help thinking the design of the packages for the last few years was to allow potential buyers within reach based on the income level, but basically the developers could not care less of what happens when the economy face a slight twitch or banks just could not hold on to the largely consumption loan anymore. Even if there are no crashes in the property prices, I still feel that the overpricing of the properties are due to the two parties - banks and property developers. And some parties have just the role to regulate more to help the man on the streets, as we do not want another Greenspan - who overslept and caught it way too late.

Note: If 16 or less banks can illegally coordinate to control the LIBOR rate, I have no doubt that banks and larger property companies can do the same together and it may not even be illegal in this case.


Sunny said...

1) I think both the 6.6% BLR and -2% offer is not sustainable.

2) Raw material prices will continue to increase as Africa & Middle East become peace again and when the people are better educated. We will have to compete with them for resources such as flour, corn, onion, garlic, milk (due to the failure of "cow" program), etc. Disposable income will become less as the food cost portion in total life expenses is increasing (at least I can feel it).

3) The cheapest option of almost every manufactured product, i.e., "made in China" is getting more and more expensive as the labor cost in China is escalating. Again this will further reduce our disposable income.

When the pressure of living is getting too high, government must make sure that the emotion of people are under control. Therefore, at that critical time, they may want all the prices to be a little depressed, from property to food. The easiest and fastest way is to raise the interest rate. The only uncertainty is the speed of raising the interest rate.

Conclusion: Do not over stress our financial position. However, I feel that it is quite difficult for current property prices to go down, as labor (there is no more cheap Indonesian labor, perhaps due to the good palm oil prices) and building material costs are increasing. Those who have not own a house are caught in the difficult situation.

jack-max said...

Sifu, house is always overpicing. Price for property will always be high. Those who already invest in real estate got caught. I live in KL, those house advertising running rampage. 0% downpayment and bank lelong all over the place. If I got money, I'm not willing to invest in real estate too. Those agents always told me can get 100% return. Booo!!!

felicity said...

It is very important to own a home especially the first one, however let's not be overly optimistic. As in anything that are invested, house or stocks can be overvalued as well as undervalued. That's the nature of investment.

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