KAJANG, 3 January: It has become the norm that apart from getting housing for homeownership, people are investing in housing for wealth creation. During the earlier cycles of house price run-up, many who have made timely investment into housing have reaped good return in value from their investment properties. But when prices move in the opposite direction, the situation can become very hostile to property owners especially those who are heavily tied up with home loan mortgages.
When is the right time to buy or invest in a house?
This is indeed the burning question that many hopeful homebuyers and investors would be keen to have sound and solid answers to. A research team in UTAR led by Asst Prof Dr Yip Chee Yin, is currently conducting studies on the Malaysian housing market under the Ministry of Higher Education Fundamental Research Grant Scheme (FRGS). Based on the information collected through interviews with industry players and consumers as well as results of econometric modelling, the research team will present their findings in a 2-part series which will provide valuable insight to help readers make more informed decisions regarding their housing investments, This article is the first of a 2-part series that will also look into the current state of the domestic housing market.
Malaysia is facing many significant challenges both within the country and internationally including the decelerating economic growth rate, lower oil prices and falling value of the ringgit. On the backdrop of all these critical issues, the domestic housing market has entered into a sluggish phase. From the opinion of those interviewed, both housing industry players and consumers, the housing market is adversely affected by the pessimistic sentiment over the uncertain economic outlook of the country. On the domestic front, the country is in the midst of a turbulent economic-social-political environment, beset with perennial problems from political tussles to weak governance. It does not help that bad news or negative news, be they facts or rumours, usually receive greater attention. And in this digital age, news travel fast and far. Inundated with such negativities, people’s confidence gradually erodes. This negative perception is shared practically by all those interviewed from both the supply and demand side of the housing market.
While the development of external challenges is not within the control of the country, the government of the day must put in concerted effort to draw up effective policies to enable the nation to ride through these rough patches. Most countries face the same external factors but handle them differently via individual government policies, as demonstrated by the better performance in economic growth of some of our regional neighbours. The state of the current Malaysian economy is largely due to the various policies implemented by the Government. The present Government needs to focus on key areas of concern and implement bold but positive policies to gain back the Rakyat’s confidence as well as to demonstrate its capacity in influencing the economy and creating sustainable economic growth. This will immediately improve the public sentiment and restore confidence which will then produce a chain reaction that will improve the overall economy in general and the housing market in particular.
Malaysia is currently in the midst of the downward trend of the most recent housing price cycle which has commenced around 2010. The current growing slack in housing sales is apparently gaining traction as shown by the increasing number of unsold houses at the end of the 2nd quarter of 2016, a jump of 16% over the previous quarter. In the secondary market, offers for sale are aplenty. Meanwhile, the brakes are being applied on construction activities as witnessed by the falling number of piling drivers and sentry cranes on the horizon, especially in hot demand areas.
To get a clearer picture of the pattern of change and fluctuations of prices in the local housing market, we estimate the housing price cycles using Figure 1 which shows a graph illustrating the year-on-year (y-o-y) house price changes from 1989-2016.
Figure 1 suggests that there are three cycles of house prices during the periods from 1990-1993, 1994-1997 and 2010-2016. The first two cycles involve rapid increase in house prices and subsequently followed by sharp drop which are basic characteristics of a housing bubble. However, the third cycle demonstrates a comparatively more gradual rising, peaking at a y-o-y increase of less than 20% between 2010 and 2013 when the trend reversed. The downtrend is also taking a rather gentler gradient. This means that this time around, the housing market will not be as turbulent as the last two cycles two decades ago. This can be attributed to the timely interventions taken by the government as well as the quick adaptive approach of housing suppliers to sustain demand/sales.
Opinions gathered through interviews with housing developers, architects, project senior managers, civil engineers and marketing officers, point to a serious confidence crisis in the national economy being the primary factor that is depressing the housing industry in general, a point that seems to be supported by statistical figures. GDP growth rate has declined to about 4.5% which is 0.7% lower than the 5 years (2011-2015) average growth rate. Private sector spending has slowed down considerably. Both consumption and investments saw a slower growth in 2015 of 4.4% in Q3 compared to 5.7% in Q2 and 9.6% in Q1. Consumer spending (51% of demand) had its annual growth pulled back sharply to 4.1% in Q3 from 6.4% in Q2. These drops in economic growth, consumer spending and investments are shown in Figure 2. Many interviewees opined that concerted efforts by all parties and the right policies are vital in restoring the confidence of both our people as well as foreign investors in order to strengthen the economic growth.
The housing industry in Malaysia generally caters mainly to the local market with only a small percentage going to foreigners. The problem facing the industry now is more of issues of supply and demand. With supply being highly inelastic in the short-run, the effect of dedicated government policies will take a while to kick in. While consumers complain of the skyrocketing of housing prices, suppliers have a rather different view. Some developers feel that housing prices have over the years moved up but in a controlled manner. This trend is especially so in growth areas in the country; a typical example is the Klang Valley. As land become scarcer in prime areas within the city and its immediate surroundings, property prices would naturally spike up. This happens all over the world. But with the improved infrastructure (highways, LRT lines, upcoming MRT lines), new growth areas further away from the perimeter of the city are developed with prices of homes at lower and more affordable levels. Such new growth areas include Cyberjaya, Semenyih, Rawang, Nilai, Seremban, etc., apparently offering lots of choices to the homebuyers. Thus house prices are moving up largely due to higher land cost, construction cost and compliance cost but still have not moved beyond affordability. And again due to high land cost, construction cost and compliance cost, house prices are not likely to come down. According to these developers, the best-case scenario is that prices will stabilise because they, the developers, will hold back new launches and slow construction once they think that they do not make reasonable profit from their project.
The days of volatile housing prices are over and speculators have long retreated to the sideline as commented by a developer. Due to slowdown in sales, developers have become more adaptive to the market, adjusting to the needs of the buyers in terms of product type, specifications and neighbourhood facilities. If developers are not able to price their houses within the attractive/competitive range then they will lose out. Additionally, they lamented that sales are significantly affected by the low approval rate of bank loans following more stringent regulations imposed by Bank Negara Malaysia. With the already very high household debt (reported currently at around 90% of GDP), the more demanding loan approval criteria aims to protect the borrowers and the stability of the local financial industry which will check the risk of housing bubble threat.
A further concern raised by one of the developers is the aggressive participation of foreign developers in the local housing market with mega projects. It is feared that these projects covering thousands of units when completed over the next one or two years would have significant negative effect on the already sluggish market. Nevertheless, the feeling is that it is now a buyers’ market where they are spoilt for choice. From the point of the consumers though, with the low confidence in the outlook of the economy and future prospects, people are paring down their expenses and re-assessing their financial balance sheets. Would people be so willing as yet to pick up another long term big mortgage bill?
Concern has also been raised of foreigners taking advantage of the weakened ringgit and entering the housing market to snap up properties and thus could contribute to unhealthy price hikes and more serious consequential slowdown effects on the housing market. Our opinion gathered shows developers have a different view on this issue. Foreigners are attracted to prime areas mainly KL, Penang and Johor Baru/Iskandar and Melaka. These are always premium price locations where foreigner buying has minimum influence on price movements. Additionally, as pointed out by some developer respondents, the foreigner purchase trend over the years show a relatively low uptake, within the 20% to 30% range and on properties in the high price category, restricted by the minimum price level set by the Government.
Yet looking at the above scenario, therein lies a seemingly ironical situation – that of the issue of affordability. There is much concern of the growing inaccessibility of housing, particularly to those in the 20s-30s age group, that has gotten society worried sick lest they become a “homeless generation”. When the market was running up steeply, the Government implemented various measures to control the housing price rally and has since taken concerted efforts with various programs to help target groups on homeownership.
But the bottom line is still the purchasing capacity of the consumers which is significantly linked to disposable income, a factor that in turn is dependent on economic growth. If history is of any guide, economic activity is cyclical.
In Part 2 of this series, the authors will try to analyse the bearing of the housing market in the current cycle and suggestion on the timing for entry into the market for intent buyer/investors.
This article is presented by the Research Team of UTAR currently undertaking a study on the Malaysian housing market. This study is funded by the Fundamental Research Grant Scheme (FRGS) grant from the Ministry of Higher Education. The Research Team members are Yip Chee Yin (team leader), Choong Chee Keong, Au Yong Hui Nee, Abdelhak Senadjki, Woo Kok Hoong, Tan Yan Teng and Ahmad Nazri bin Wahidudin.