Oct 27, 2010
Two of my former students came to my office the other day. Both of them are doing extremely well. They own properties worth more than RM10 million and have been full-time property investors for the last nine years. Naturally, our discussion soon treaded into the current property scene in Malaysia.
They agreed with me that prices have gone up over the roof in recent times, so much so that even they had problems buying properties! However, the main surprise was the participation of young people at launches and even auctions. They were surprised at the aggressiveness of these young investors. On more than one occasion, they witnessed young investors buying four and even five properties at one go! The main reason these young investors can buy properties like they are buying groceries at the supermarket is because they can take monster loans, i.e. minimum down payment and maximum loans which can be almost 100 percent the cost of the properties.
I have noticed this trend as well. The participants at my recent property seminars include a lot of young men and women. These young investors are smart, knowledgeable, hungry and more importantly, eager to learn so they can become even better. They are not willing to wait for 20 years to make their money. They want it all and they want it now!
In some ways, they may not be acting recklessly. Actually, they may be doing a sensible thing – repeating a formula that brought them success. See, they have known nothing but success in property investment. Banks handed out mortgages freely, interest rates low, LVR high and best of all, prices shot upwards by thirty or forty percent in two years.
In years 2000 to 2006, property prices rose by almost 100 percent while income only rose by two percent
They made money, so it is certainly sensible for them to continue doing it and in fact, take it to limit so they can multiply their wealth even faster. While I am happy for these young investors, I am starting to fear for them as well. I have seen this type of euphoria twice before (mid-1980s and mid-1990s) but I cannot help but to see similarities between what happened in the U.S. and our country now. In the mid-2000s, banks in the U.S. were dishing out mortgages to just about everyone, including college students. You know, giving loans to people who are still studying and have no income yet. These were termed as NINJA loans – No Income, No Job or Assets. As incredible as it may look now, it made sense at that time because prices were rising by double digit percentages every year after year 2000. So by the time the students completed their studies, the prices of the property would have doubled! They sold it, paid off their student loans, obtained a degree and perhaps even pocketed from some of the proceeds as well.
In years 2000 to 2006, property prices rose by almost 100 percent while income only rose by 2 percent. Of course, such increase could not be sustained. Once the sub-prime problem surfaced, the property bubble burst in year 2007. Prices have dropped by 30 or 40 percent, and is still trending downwards today.
Of course, that is in the U.S., not here. It cannot happen here as our banks are not so reckless as to approve mortgages for everyone, interest rates are ‘normalising’, prices are ‘stabilising’ and most investors know what they are doing at all times.