AS I was getting ready for some exercise early yesterday morning, I saw a man walking up the street dropping a leaflet into the mailboxes of homes. I took one off him as he approached the front of my house and it was an advertisement for properties. The houses on offer in the secondary market were not your typical medium cost house or apartment that many Malaysians live in these days, but were million dollar dream homes that many aspire to own.
This got me thinking. Why are many new property launches and existing homes exorbitantly priced? Why are there few to none of the bread-and-butter houses being built? If developers keep developing and selling higher priced properties, this will lead to an imbalance in supply and demand in the housing market.
Some of the last major townships launched in the Klang Valley include Setia Alam, Kota Damansara, Mutiara Damansara, Ara Damansara and areas surrounding Kepong and Puchong. Initially catering for affordable homes, the price and types of properties being sold in those areas have moved up in scale.
The surge in home prices these days has been faster than the rise in wages and it would not be long, if it is not already happening, before such properties in the Klang Valley become too expensive for the average Malaysian. Cheap financing has enabled Malaysians to own more expensive houses. Home buyers often require a small downpayment before purchasing homes. The low interest rate environment, banks flushed with cash and innovative schemes have also allowed loan repayments to be kept within check – for now.
Furthermore, banks wanting to grab a larger slice of the home loan market are said to have engaged with external sales teams and other agents whose sole motivation might be to secure more loans. While the absence of large land banks would be the prime reason for developers opting for smaller and higher priced properties, the process of pricing, while still a function of supply and demand, is also subjective. This subjective approach is also the norm in the secondary market.
Those who own homes would have heard about how much properties in their neighbourhood were recently sold for. People would then take that as the market price and would likely want the same price or higher when selling their home. A gauge of what a house is worth would be the rental it can fetch. As prices of homes rise and the rental market, which is more linked to the disposable income of people, remains static and rigid, the inflated prices of property becomes more apparent.
Yes, price inflation of properties – if it remains strong – would offset the loss in returns from rent if people buy properties as an investment. But then people should also consider whether they are better off renting and investing their money in higher yielding assets.
Escalating property prices also pushes homes out of the reach of the current generation. Younger people who are just starting out in life may have to live at the fringes of Klang Valley, which then increases their cost of commuting to their workplace. Those wanting to stay in the Klang Valley have then no choice but to opt for cheaper apartments or low cost dwelling. It’s almost like the pickings are getting slimmer.
My parents’ generation could afford a bungalow, mine a terrace house and what about my children’s generation if prices keep going up as they have? The escalation in home prices, which would add to the leverage of home buyers, is also a warning sign. All it takes is one bad recession – recessions are becoming more frequent than in the past – and that would be trouble. We only have to look at the implosion of the sub-prime market in the US to see what a housing collapse can bring.
By JAGDEV SINGH SIDHU
Thurs 12 Aug 2010