Property market in ‘autumn phase’

Property prices within the Klang Valley and Penang have appreciated dramatically in the past few years. The increase has been between 30% to over 100%.

This upward cycle is due to high demand and low supply, which can mainly be attributed to low interest rates and easy credit, as well as rising share and commodity prices. This has partly been due to an oversupply of money in the financial system, coming from simultaneous global stimulus programmes.

The recent Malaysian property upturn has also been the result of the entry of the new, young working class of buyers, i.e. those born during the period of 1979-1985 (age 27-33) who are now in the workforce.  The double-generation structure of parent-and-children property buyers has helped to push up demand. The parents have provided the 10% down payment and their working offspring have taken up the monthly repayments.

Prices may adjust to yields if liquidity programmes fail

Yield, however, has dropped substantially, in inverse proportion to prices.

For example, in 2008, the purchase price of Property A is RM600K, and the monthly rental is RM3,000.
Property A Gross Yield = (RM3,000 X 12)/RM600,000 x 100% = 6%

In 2012, property A has appreciated to RM1.2mil but the monthly rental has increased to only RM3,500.
Now, Property A’s Gross Yield = (RM3,500 X 12)/RM1,200,000 x 100% = 3.5%

Therefore, Property A’s gross yield has reduced from 6% to 3.5%, even though its price has doubled or increased by 100%. That’s because the monthly rental has only increased by RM500 or 16.6%.

Property yields give a good indication of the properties’ real values, and this indicates that the properties’ real values have dropped.

So far, the extension of stimulus programmes like QE1 and QE2 to QE3 will most likely maintain liquidity in the financial system. In the long run, however, this liquidity may not achieve its desired effect. When that happens, property prices may adjust south in order to increase its yield.

Signs of the ‘property autumn’
In my StarProperty.my online article (http://www.balancelifesuccess.com/media_release/2011-october-12.pdf) last year, I expressed how I felt that the Malaysian property scene was in a “property summer” phase. I advised property investors not to be property fools by buying property at their highest price levels.

The Malaysian property market has now entered a “property autumn” phase, I think. Sales volumes have declined since the beginning of 2012. The general sentiment is getting to be more cautious.

The 70% capping for third residential loan and loan based on net income instead of gross income has slowed down the property market. At the same time, the RPGT was increased to 15% for first two years and 10% for the remaining three years in the last Budget.

Declining commodity prices such as palm oil, may reduce the income of smallholders and eventually, affect property prices in the rural areas.

Declining commodity prices such as that of palm oil and rubber, may reduce the income of smallholders and eventually affect property prices in the rural areas. When the stock market turns south, it may reduce liquidity in the financial system and affect property prices in urban areas.

The resolution of the fiscal cliff on Jan 1, 2013, may have a direct impact on global money flows. Malaysia’s general election expected to be held latest by first half of 2013 may also affect the sentiment of the property market.

What to do if the ‘property winter’ comesAs nobody can forecast the future, we can only anticipate the most likely scenarios and prepare ourselves for the best or worst scenario. Unexpected financial events can happen and it has happened frequently in the past. We cannot change the direction of the property market but we can adjust our financial sails to take advantage of the winds of change towards achieving our financial goals.

For the first-time home buyer, you may rent first and buy later when the right property with the right price appears.

The cost of construction of newer property will increase in tandem with the higher cost of land acquisition, building materials and labour. The developer has no choice but to increase the price in order to stay profitable.

Older properties built over 10 years ago – with cheaper land and construction costs – are selling substantially lower than newer property. Therefore, older properties give better rental yield and potential capital gain. In particular, consider undervalued older properties nearby overvalued new property developments.

For overleveraged investors or speculators, you may take profit and float your cash flow position. Cash will become king when the “property winter” phase arrives.

Developers can avoid abandoning their projects by having contingency plans for worst case scenarios, such as sufficient funds or financial facilities to support ongoing operational costs until completion.

If not, when the property “seasons” change unexpectedly, dreams of both developers and purchasers may just become long nightmares.

Source: http://www.starproperty.my/index.php/articles/investment/facing-property-autumn/