Q&A: Should we buy now or should we just wait?
Dear Azizi Ali,
I have recently just got married and wish to start a family by buying our first property. As you know, housing prices in Klang Valley are rocket high. Even if both my husband and I can afford to down for a new house or second hand, the monthly instalments will take up a big portion of our net disposable income (which puts a strain on us). We are now looking at an area known as Bukit Subang (next to Denai Alam). The price is half of Denai’s (same size). We want a house that will have reasonable appreciation as a form of future investment and for current purpose, for own stay.
However, we are receiving opinions that we should delay the purchase as the property bubble may burst. Reason being, that a lot of executives whose monthly salary is in the region of RM5,000 to RM6,000 are buying houses that are worth almost a million for investment and when it’s time to start paying the instalment, defaults will begin and foreclosure will kick in. At the same time, supply is more than genuine demand (i.e. investor demand is more than genuine purchase).
Do you think we should buy in that area? Should we buy now or should we just wait? If we do buy, do you think that it is wise to stretch ourselves (i.e. instead of buying Bukit Subang, we buy in Denai Alam?)
Advice and opinions are appreciated.
Regards,
Aquila
————–
Dear Aquila,
Firstly, congratulations on your marriage. May you and your husband live happily and prosper!
Next, I understand your concerns about the property market and they are valid concerns indeed. Prices in selected areas in KL and PJ have risen by some 50 percent in the last two years. I doubt that anyone’s income have risen by that much in the same period. As property prices have to bear some semblance to income, there is a bubble in these areas – which is my way of saying, there are pockets of bubble today.
While prices can still rise and defy gravity for a little bit longer, they cannot be sustained. And when that happens, it will come down. By how much it comes down is anyone’s guess.
Third, you are right again about the default rate. There is no way (or perhaps more correctly, little way) that anyone earning RM6,000 a month can afford to pay a mortgage costing close to RM1 million. The people who are doing this is hoping that the price will rise fast and high enough so they can sell the property before their obligations to repay the mortgage kicks in. Otherwise, they will be in serious trouble.
Actually, some people are already in trouble. I have noticed that the quantity of auction properties have increased lately. More importantly, is the quality of the properties being auctioned. While most of the properties used to be in the not-so-hot areas before, my eyes light up when I see houses even in the hot areas today. This trend will only continue in the near future.
Fourth, your thoughts of buying in a place slightly further from the CBD (central business district) areas just confirms the pockets of bubble theory. Prices in the hot areas are way too expensive, so you are looking at the cheaper and usually, further suburbs. You are not the only person thinking of doing this; tens of thousands are thinking the exact same thoughts. And it actually makes sense, “Why pay through the nose and suffer when you can buy a cheaper property elsewhere?” Yes, you have to travel a little bit further to get to work (and shop at the designer boutiques) but it is better than suffering every month paying for a monster mortgage. By the way, this happens every time prices rise to astronomical figures. I remember the same thing happening in the late-1980s when property prices in downtown San Francisco rose substantially. So, instead of paying ridiculous prices buying in downtown areas, people just rented or bought the cheaper properties in the suburbs. As a result, the downtown prices soon collapsed. By the way, in case anyone is wondering, I did not live there; I just read about it!
Now that the introduction is done, let me answer your question – finally! If you do not want to wait, buy the property in the cheaper (and further) areas. That way, you are paying a more down-to-earth figure for a property and also avoid carrying the burden on paying off a monster mortgage. A house is supposed to make you happy. I cannot see how anyone can be happy for long if the mortgage is taking 50 percent of their income every month!
On the other hand, there are also good deals in the hot areas today, in the form of ‘motivated’ sellers and auctions. Look deeper and you will find them. Finally, I’d like to share one last piece of advice – wanting to become rich is glorious; wanting to become rich next week is asking for trouble!
I wish both of you the best.
Regards,
Azizi Ali
Saturday, November 13, 2010
Property bubble about to burst in Malaysia?
This piece of article is from The Star 13th November 2010
More restrictions to ease property bubble?
THE rising prices of houses is still one of the hot topics among average Malaysians as the threat of higher inflation is growing by the day.
The fact that Bank Negara had early this month imposed a lower loan-to-value ratio (LVR) for those taking up their third and subsequent mortgage loan shows the central bank also considers the situation quite worrying. Effective from Nov 3, house buyers who have already signed up for two mortgages and are applying for their third loan will only be eligible to get financing of up to 70% of the value of their house.
Although it is largely seen as a timely pre-emptive measure to avert unhealthy speculative activities, some quarters voiced their reservation that the measure is too mild and are asking for "stiffer" measures to rein in rising prices.
Their argument is that people who can afford the higher downpayment for their property purchases will not be affected by the lower LVR although the measure may be effective on those who need financing assistance.
The LVR should be further reduced for those applying for subsequent loans. Those applying for their fourth loan should only be granted up to 60% and fifth loan up to 50%, and so forth.
Since the LVR is now used as the basis to decide on the quantum of mortgage loan that house buyers can sign up for, some properties with "unrealistic" price tags are finding it hard to get financing unless their values are adjusted accordingly. Hopefully, this situation will make developers uphold their responsibility properly and price their project according to the fair value of the property.
Just because there is strong demand for landed houses these days, developers should not take advantage of the situation by pricing their property a few notches higher and burden buyers unnecessarily.
Like some parts of the Klang Valley, the situation is also quite apparent in Penang where basic intermediate terraced houses are being priced close to or beyond RM1mil each. With house prices shooting off the roof, banks should also play a more responsible role and should not over-push their housing loans. The "war" between banks is still evident with some banks trying to outdo their competitors by offering "aggressive" interest rates of up to 2.5% below base lending rate.
In fact, banks are still aggressively pushing their credit facilities to consumers.
Although the market situation may still seem to be under control, it is important for all stakeholders to be vigilant and take note of any fast changing signs of overheating.
Like one observer says: "Bank Negara's LVR curb is not just about the restriction per se, but more importantly it is about the SIGNAL that Bank Negara has send out, and that is, the central bank is keeping a wary eye on things and more measures could be introduced if the market does become frothy."
Hence, the psychological impact of such a move is more important in that it will remind developers, potential borrowers, and bankers to be more judicious with their actions, and that is good for the market in the long run.
Otherwise, the central bank may have to impose further tightening measures if the market heats up further.
In fact, various Asian governments are already looking to impose capital controls to curb growing risk of asset bubbles in the region, signalling that the red flag has been raised on the havoc that can be wreaked by the inflow of hot foreign money into the region.
The measures underscore concerns over the US Federal Reserve's second quantitative easing (QE2) – the printing of money to buy US$600bil long-term government bonds – amid an ‘'extended period'' of super-low interest rates to support its weak economy.
The side-effect of depressing the US dollar and keeping borrowing costs near zero will cause speculative capital inflow to Asia as investors seek higher yields in emerging markets.
Hence, the environment is highly conducive for asset prices to spiral further leading to asset bubbles. Besides the high liquidity in the system, the low interest rates and inflow of foreign funds are bound to send asset prices soaring if left unchecked. And when these hot money pulls out, it will result in financial destability and a meltdown in the assets market.
Even without the threat posed by these hot-money, governments in Singapore, China and Hong Kong have already imposed a number of restrictions to dampen the rise in property prices and curtail speculative activities in the property sector.
So it won't come as a surprise if Malaysia also have to resort to more restrictions to ensure the financial and property markets continue to be sustainable.
l Deputy news editor Angie Ng hopes industry players are aware that the average Malaysian is still not a high income earner and that they will dedicate some of their projects for well planned affordable housing projects as part of their corporate responsibility.
More restrictions to ease property bubble?
THE rising prices of houses is still one of the hot topics among average Malaysians as the threat of higher inflation is growing by the day.
The fact that Bank Negara had early this month imposed a lower loan-to-value ratio (LVR) for those taking up their third and subsequent mortgage loan shows the central bank also considers the situation quite worrying. Effective from Nov 3, house buyers who have already signed up for two mortgages and are applying for their third loan will only be eligible to get financing of up to 70% of the value of their house.
Although it is largely seen as a timely pre-emptive measure to avert unhealthy speculative activities, some quarters voiced their reservation that the measure is too mild and are asking for "stiffer" measures to rein in rising prices.
Their argument is that people who can afford the higher downpayment for their property purchases will not be affected by the lower LVR although the measure may be effective on those who need financing assistance.
The LVR should be further reduced for those applying for subsequent loans. Those applying for their fourth loan should only be granted up to 60% and fifth loan up to 50%, and so forth.
Since the LVR is now used as the basis to decide on the quantum of mortgage loan that house buyers can sign up for, some properties with "unrealistic" price tags are finding it hard to get financing unless their values are adjusted accordingly. Hopefully, this situation will make developers uphold their responsibility properly and price their project according to the fair value of the property.
Just because there is strong demand for landed houses these days, developers should not take advantage of the situation by pricing their property a few notches higher and burden buyers unnecessarily.
Like some parts of the Klang Valley, the situation is also quite apparent in Penang where basic intermediate terraced houses are being priced close to or beyond RM1mil each. With house prices shooting off the roof, banks should also play a more responsible role and should not over-push their housing loans. The "war" between banks is still evident with some banks trying to outdo their competitors by offering "aggressive" interest rates of up to 2.5% below base lending rate.
In fact, banks are still aggressively pushing their credit facilities to consumers.
Although the market situation may still seem to be under control, it is important for all stakeholders to be vigilant and take note of any fast changing signs of overheating.
Like one observer says: "Bank Negara's LVR curb is not just about the restriction per se, but more importantly it is about the SIGNAL that Bank Negara has send out, and that is, the central bank is keeping a wary eye on things and more measures could be introduced if the market does become frothy."
Hence, the psychological impact of such a move is more important in that it will remind developers, potential borrowers, and bankers to be more judicious with their actions, and that is good for the market in the long run.
Otherwise, the central bank may have to impose further tightening measures if the market heats up further.
In fact, various Asian governments are already looking to impose capital controls to curb growing risk of asset bubbles in the region, signalling that the red flag has been raised on the havoc that can be wreaked by the inflow of hot foreign money into the region.
The measures underscore concerns over the US Federal Reserve's second quantitative easing (QE2) – the printing of money to buy US$600bil long-term government bonds – amid an ‘'extended period'' of super-low interest rates to support its weak economy.
The side-effect of depressing the US dollar and keeping borrowing costs near zero will cause speculative capital inflow to Asia as investors seek higher yields in emerging markets.
Hence, the environment is highly conducive for asset prices to spiral further leading to asset bubbles. Besides the high liquidity in the system, the low interest rates and inflow of foreign funds are bound to send asset prices soaring if left unchecked. And when these hot money pulls out, it will result in financial destability and a meltdown in the assets market.
Even without the threat posed by these hot-money, governments in Singapore, China and Hong Kong have already imposed a number of restrictions to dampen the rise in property prices and curtail speculative activities in the property sector.
So it won't come as a surprise if Malaysia also have to resort to more restrictions to ensure the financial and property markets continue to be sustainable.
l Deputy news editor Angie Ng hopes industry players are aware that the average Malaysian is still not a high income earner and that they will dedicate some of their projects for well planned affordable housing projects as part of their corporate responsibility.
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