There are many reasons why a property bubble may start building and later burst.
An academician recently gave his views on why this happens and cautioned the government to be ready.
His views, that were published in many media, were widely shared and got many people worried.
However, as long as we are not overstretched at present from property mortgage payments, there is no need to worry. A more important question would be, “Will I lose my job in the near future?
If the answer is “No”, then there is no need to sell your home at a much lower price than what you bought it for.
Perhaps it’s better to understand the usual three reasons that are the clear signs of an impending property bubble burst.
1: Sharp and continuous increase in house prices
This is when property prices rise at a much faster pace than our salary growth. Remember the period between 2009–2013 in Malaysia? Yes, generally every new property launch was at a higher price.
Then, cooling measures from Bank Negara Malaysia were introduced. Speculative activities were then minimised instead of being the norm.
When banks only lent to qualified borrowers, double-digit house price growth was stopped in its tracks.
Today, when we ask our real estate negotiator friends, they often tell us of certain potential buys now at “Below-Market-Value (BMV)”.
Of course, we should still be aware that BMV here does not necessarily mean a good buy unless the BMV was not due to the Bank Negara Malaysia-level price previously.
First reason for a property bubble burst? Not happening currently. We may refer to the image to understand that those years of double-digit house price growth have passed.
2: No such thing as ‘affordable’ choices
This is extremely important. The B40 and M40 households in Malaysia comprise 80% of total households. They need affordably-priced homes and not those costing RM500,000 or higher.
This is the reason why the PR1MA, Rumah Selangorku and even RUMAWIP programmes came into being. The government says it intends to build one million new affordable homes within 10 years.
Of course, we hope these affordable homes are in well-connected areas, comfortable to stay and built as per the announced timelines.
Once this happens, the pressure on the housing market is lessened because property transactions will continue to take place instead of only the rich having the money to buy and the poor struggling to buy a place or having to rent forever.
There are also rent-to-own schemes to consider. The property bubble will burst when there are too few affordable choices in the market. Even if we do not look at these new affordable choices, there is also the secondary market which will provide choices under the sub-RM400,000 category.
#3. Number of Non-Performing Loans
Banks in Malaysia are listed in Bursa Malaysia. They publish their quarterly results without fail. (If they fail to publish them, problems have started…)
Please take a look at the number of Non-Performing Loans. If we see a spike in the number, we know that the borrowers of the banks are no longer able to service their debts.
What this tells us is that the potential for the properties to be auctioned off is high and this is usually the start of a loss of confidence, after which the herd mentality kicks in.
More people will be looking to sell their properties at lower prices and a crisis then begins.
In brief, the only reason why people start to miss their payments is because they have lost their jobs. This is why this number is extremely important to take note of.
Bear in mind that there’s no such thing as a “since all these three signs are healthy, there’s no potential of a property bubble bursting”.
Who knows if another world financial crisis will unfold in the near future which will pull all the rest of the world into a recession?
Based on current numbers, Malaysia is unlikely to be the starting point for such a crisis. According to local media, this is what our Finance Minister Lim Guan Eng said, “Economy remains strong, fundamentals solid.”
Beyond these three major signs, we can also look at the unemployment rate of the country. Any sudden spike indicates problems ahead.
When car sales are low, we know something bad is about to happen. When the number of visitors to popular shopping malls is low, we know people don’t have money, and therefore do not go to places where they are tempted to shop.
So keep your eyes peeled on what’s going on around you.
This article has appeared in kopiandproperty.com
Charles Tan blogs at property investment site kopiandproperty. He dislikes property speculators and disagrees that renting is better than buying. He thinks it’s either property or poverty. He is presently the CEO of an auction house auctioning assets beyond just properties.