(Part 1 can be found here)
KAJANG, 3 January: For many people, buying a house means tying oneself to a monthly mortgage repayment for the next 10, 15 or perhaps 20 years. Houses are expensive items. In a volatile market, a slight up or down swing could mean a difference in price of tens of thousands of ringgit. When prices are rapidly moving up, if we wait we could end up paying much higher prices. When prices are dropping, if we buy too early, we may suffer similarly. Timing can therefore have a great impact on the value of the purchase. However, it could be difficult working out the right time to buy a house in a volatile market. In this second part of our article, we proffer some suggestions on how to identify signals for home buying in the context of the current environment of the Malaysian housing market. These suggestions are based on the statistical findings/results obtained thus far in our current research and the application of conventional wisdom.
The Malaysian housing market was experiencing almost unprecedented price growth over the past few years. It was only until around 2013 that prices appeared to have stabilised. As home prices spiralled higher, people are beginning to wonder if the local housing market is in the midst of a housing bubble which is ready to burst. Nevertheless housing price index data suggests that the market is not on the brink of collapse. But logically, what goes up must come down and vice versa. Therefore we need to determine the trend and the current stage of the housing market. With this information and taking cue from past trend as well as the observation of certain developments in the market, will help would-be home buyers make more informed decision. We begin by analysing and determining the state of the housing market of which we have given an introduction in the first part of this article.
We employ a 2-step process to estimate the right time to enter the market. Using the year-on-year increase in housing prices, we track the movement of housing prices over the period 1990 to 2016 using simple graphical method followed by a statistical algorithm for the verification of the results. Not only are the results traced out in Fig. 1 and 2 supportive of each other, they are in line with the historical records. This convinces the robustness of our method in tracing the trend of price movement. With this first step, we estimate the period to consider home purchasing. Our results as shown in Figure 1 reveal 2 past episodes of housing bubble in the domestic market for the period 1990 – 1993 and 1994 – 1998. Housing prices were on the uptrend between 1998 and 2000 and thence hovered within short range until 2009 when price growth accelerated again, reaching another new high in 2013 when we observe the turnaround in price movement. Between 2009 and 2013, housing price expansion points to a bubble-making period. The ensuing years from 2013 saw the downturn in economic conditions both within and outside the country which negatively impacted the housing market. With the benefit of hindsight, we believe the interplay of the various market forces and factors as described in the first part of this article has brought about the reversal in direction of the housing price movement, while also providing a buffer that allows gentler price drop. Looking at the graph in Fig. 1, the housing market has already entered the downward slope of the current cycle and thus far it looks relatively stable, reflecting the supporting efforts of the government and housing suppliers.
Logically, this is now the period to consider buying. However, there is still possibility this trend is just an intermediate short cycle or the downward momentum of prices could increase further in favour of buyers. Our next step is therefore to look for vital signs in the market that favour buying activities and thus help to enhance the accuracy of our prediction on the right time to purchase our home. This involves the monitoring and logical analysis of certain economic and market events and scenario that could impact the housing market. Following are some suggestions for the interested home buyers:
Suggestion 1: We are in the midst of a price cycle which has just crossed the peak at 2013 and is on a gradual down slide. This phenomenon is a vital sign for us to enter the housing market. The question is: when shall we enter the market?
The reason for this suggestion is that when the cycle is on the downside, house prices generally will be lower than the normal levels. However, we need to ascertain that the market is actually in the midst of a price cycle and for that matter, on the downslope. (To do so, our research team has modified an existing statistical algorithm to trace out the cycle.) Then, you may ask, why not wait for the cycle to bottom out before we start buying? This idea is only ideal because there is no specific method to forecast and pin-point the bottom out. We only see the bottom out of the cycle in history. Nevertheless, we can use the most recent statistical model to investigate this uncertainty. The result is illustrated in Figure 2. Our statistical testing results show that for the period 2009-2016 the housing market is theoretically in a bubble. However, practically, it is a price cycle which has peaked, so there is less likelihood that house prices will go up further unless there is visual sign that it is on the way to follow a “U” turn however gradual it might be.
Suggestion 2: Advertisements on residential properties for sale are omnipresent and offers are sweetened with rebates and incentives, it is a basic indication that the housing market has excessive inventories. It is good time to buy a home.
Such phenomenon is a reflection of a sluggish market and that sellers are trying to clear existing stock. Recall that in the first part of this series it was reported that developers will hold back or slowdown on new projects when profit margins are not workable. In addition, constrained by rising costs, there is a limit in lowering prices. During an economic downturn, weak and smaller developers would likely be forced out of the market and thus easing market competition. Therefore when the backlog is cleared, prices of new home supply are not expected to be cheap. Supply squeeze may cause prices to go up instead.
Suggestion 3: when economic growth starts to improve, we expect surge in housing prices to follow. This is the time for home buying.
For the man on the street with no access to economic data, we suggest to keep abreast with economic developments through reports from the media as well as signs of recovery in economic activities, particularly in the job market. In an already weak market, when positive news starts to surface reporting of encouraging growth rates, business expansion, and forecast of a buoyant economy, employment and earnings will rise. One of the main reasons for the current problem of affordability is that wage increase lags that of housing prices. With improvement in the economy and the job market, increase in demand for housing and a corresponding housing price hike will certainly follow. So when media reports how rosy the economy is getting, it is good time for real estate investment. When the economy climbs back in full steam, the housing market may have entered into the next cycle.
The authors wish to remind readers that these suggestions are not meant to be taken as the absolute factors on working out the right time to buy a house but they are to be considered with other existing facts before taking the plunge into the market. Depending on the market environment, the influence of each factor on the buy signal may vary.
The suggestions in this article are based on the present housing market scenario in Malaysia. Reports from sellers indicate that the market is now basically being supported by first time home buyers while the government is taking an increasingly active role to help this segment of buyers with various financial plans. In addition, there is the recent report of the rising number of abandoned projects and mounting housing inventories in the country. These are signals that the local housing market has lost its vibrancy as well as any speculative fever and government stimulus is needed to help maintain market buoyancy.
As discussed in article 1, the bottom line for the housing market is still market sentiment and purchasing power of consumers, both of which are closely linked with disposable income, which in turn depends largely on economic growth. Recently there appeared some bright spots for the Malaysian economy. First, oil prices have picked up, trading well above $50 USD per barrel. Second, there is the report of China’s significant increase in investment and participation in Malaysia, specifically the East Coast Rail Link, Melaka Gateway Project and Bandar Malaysia as well as their keen interest in the KL-Singapore high speed rail. These are planned mega projects which the government expect to accelerate the recovery and growth of the country’s economy. When the effect of these development projects on the economy kicks in, barring changes in the local political scene, we expect confidence and sentiment in the market to start improving by the first quarter of 2018. Meanwhile, the current market scenario seems to suggest a ‘buy’ signal.
This article is part of an ongoing research under FRGS grant from the Higher Ministry of Education. The members of the research team 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.