IMF triggers house alarm

Is Malaysia faced with the risk of a housing market bubble?

THE International Monetary Fund (IMF) has sounded the alarm of another potentially devastating housing crash given that house prices are still well above their historical average in many countries in relation to incomes and rentals. The world financial body says the situation has emerged as one of the biggest threats to economic stability.

Indisputably, the many trillions in quantitative easing (QE) money launched by the United States in recent years and record low interest rates are among the contributors for the sharp hikes in property prices in many parts of the world today.

Is Malaysia faced with a risk of a housing market bubble and should we be worried of a potentially damaging burst of the bubble given that the inflated property prices seen in the last two years may not be sustainable?

Borrowing the definition of a property bubble from the internet site, Investopediawhich is dedicated to investment education, National House Buyers Association (HBA) honorary secretary-general Chang Kim Loong says there is a risk of a property bubble in Malaysia as property prices have increased rapidly in the past four to five years, and excessive speculation in the property market has driven property prices to “its current artificially high level.”

According to Investopedia, a property bubble is a situation that shows a run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future.

Chang says in the event borrowers could not afford to pay their mortgage instalments and the banks are forced to auction off their properties, “there is a risk a property bubble in Malaysia can burst, just like what happened during the sub-prime crisis in the US.”

Chang: Excessive speculation in the property market has driven property prices to ‘its current artificially high level.’

“Skyrocketing house prices have forced house buyers to take back-breaking mortgages which have left many borrowers with little or no savings after deducting the monthly instalments and other basic necessities. Many borrowers need to combine their income in order to qualify for a mortgage, and this has placed the family at risk as the family could fall into a deficit situation if any sudden emergencies happen to either of the borrowers,” he points out.

However, Chang qualifies his outlook by saying that as long as Malaysia’s economy holds and there is no downturn, the bubble will not burst.

“Malaysia is still a young country with high demand for housing and coupled with urban migration, there is still a strong demand. But the question is whether this group of genuine buyers can afford the properties that they want.

“Although the frenzied escalation of house prices have somewhat slowed down, overall house prices have not gone down,” Chang observes.

DTZ Nawawi Tie Leung executive director Brian Koh says the fact that housing prices have jumped 15%-20% in the last two years are actually emerging signs of a housing market bubble, but he acknowledges the fact that “a property bubble can only be recognised and confirmed as one after it has happened.”

However, Knight Frank Malaysia managing director Sarkunan Subramaniambelieves the property market is still resilient and with the market cooling measures introduced by the Government, “there will not be a property bubble like a massive property price correction but only a mild price correction of the property market.”

Sarkunan says Malaysia and the other South-East Asia countries have been the bright spots for economic growth and investment returns, and in the aftermath of the global financial crisis, they have attracted encouraging levels of investments that have also boosted their property markets leading to sharp hikes in prices.

“The governments in these countries have acted responsibly by implementing various measures to cool their property markets, averting potential property bubbles.

Despite the recent scale-back in quantitative easing by the US (leading to large reversals of capital flows), Malaysia’s economy is expected to remain fairly resilient supported by a strong banking system.”

Sarkunan says if there is a property bubble, “it is not brewing across the board but only in selected regions or locations, and in certain property segment, category and type, where there are more speculative activities and over-building.”

“A property bubble is akin to having an elephant in the room. We really need to acknowledge that in some areas, the elephant is getting bigger. But the market appears to be self-correcting. Developers are holding back their launches amid weaker market sentiment and revisiting their development plans to cater to current market demand and trend,” he adds.

Concurring with Sarkunan, CB Richard Ellis Malaysia executive director Paul Khong does not envisage any serious bubble in the market, especially this year, and further expects the market to continue to march ahead towards the second half of the year.

“The first half of 2014 has been relatively quiet as predicted earlier, as the property market has been absorbing the market cooling measures silently hoping for some good news. We currently see the secondary market becoming slightly active and prices in select locations are now looking relatively attractive,” Khong says. - The Star