IS property the best investment???

I would say 5 years ago, YES.

Today nope.

Is property the best investment?

Business & Markets 2012

Written by Nor Zahidi Alias   

Thursday, 04 October 2012 08:50

 

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About 10 years ago, my wife and I invested in a residential property in Shah Alam with the intention of keeping it for our children in the years to come. Regrettably, we ended up selling it after seeing the remarkable surge in property prices when we needed extra cash to renovate our own house. That was the only investment in the property market we ever made, and in hindsight, we should have repeated it, if we had more capital.

Property market investments, especially in the residential segment, can be pretty lucrative in Malaysia. My discussions with property associations often reveal that many property investors never regretted indulging in the buying and selling of residential PROPERTIES []. One individual intimated that domestically, it is the only worthwhile investment — as stock market investment is too volatile, unit trust returns too slow, and bond investment too complicated, requiring exorbitant amounts of capital.

Indeed, a lawyer friend recently told me about her 35-year-old client who just sold her 18th property, with her latest transaction involving a condominium purchased at RM350,000 only about 18 months ago that she then sold for a whopping RM500,000. Lucrative profits, by any measure!

When I inquired about a new property development by the beach in Kuantan, I was informed the serviced apartments due for completion in 2014 were almost fully booked. The town villas, priced at slightly over RM1 million each, are 90% taken up, mostly by foreigners.

As for the serviced apartments priced at around RM400,000 each, there is already a long list of foreign buyers waiting to purchase them if they are sold above RM500,000 (the minimum price of properties that foreigners are allowed to purchase) upon completion, according to locals in the know.

Do we have a property bubble? Those in the property sector proffer population statistics to answer in the negative: today’s housing demand, they say, is genuine, if one considers the current age profile of Malaysia’s population. Certainly, the country’s young population creates a natural demand for housing.

However, I am greatly concerned about the monumental price gains in certain segments of the residential property market, which have caused single-generation bank loans to be insufficient. Just how much will my daughter have to pay for a small studio apartment in the future, I keep wondering.

I cannot help but think that something is fundamentally wrong in some segments of the property market. Imagine this: a fresh graduate starts his first job at RM3,000 per month. After deducting the requisite EPF and tax contributions, paying for transport, food and miscellaneous items, how much is left to service a housing loan?

Not much, obviously. One can forget about buying a landed property which has a minimum price tag of RM500,000 these days. Even an apartment that costs RM250,000 is a steep price to pay for new entrants to the working world.

With house prices escalating, new entrants to the 

working world find it almost impossible to buy a

residential property.

Now let’s turn our eyes to the other end of the spectrum, a privileged group whose members can well afford to place millions of ringgit in down payment to buy multiple properties and inevitably cause house prices to skyrocket. According to a property association, foreign buyers are not responsible for this phenomenon because they account for only a fraction of total property transactions.

Good point, but this argument misses one crucial fact: it is not the size of the transaction that matters in driving prices up. Rather, it is the benchmark price set when these transactions are completed. When prices move up because of these few transactions, new sellers (including domestic players) will base their prices on the new benchmarks set by foreigners, no matter how small a particular transaction was.

So, lo and behold, we have two distinct groups of people: those who save every single penny they make from (perhaps) multiple jobs they toil at to pay for their monthly rent or loan installments for a mere 700 sq ft apartment, and a group of lucky investors who can buy multiple units and keep them until profits are sufficiently sizable for them to sell and purchase even more properties (the latter group may represent what the US Republican presidential candidate considers the other 53% who do not support President Barack Obama).

Based on this scenario, I am inclined to think that some form of meaningful government intervention is needed to ensure the gross imbalances can at least be partially mitigated. What kind of intervention, you ask?

Well, the real property gains tax has certainly proven to be unpopular, and is being derided as a potential threat to the general economy, especially if a sharp decline in property prices results. Just look at China, the critics say. We surely do not wish for that conundrum to happen here.

The alternative could be raising the RM500,000 minimum price threshold for foreign property purchases. What about increasing this limit further for already-scarce landed properties? After all, Malaysia remains one of the few countries that allow landed properties to be sold to foreign buyers. Singapore, Thailand, and the Philippines have prohibited such sales.

Another suggestion would be to impose the 70% loan-to-value (LTV) ratio requirement on the purchase of the second property (from the prevailing third), or better yet — reduce the LTV ratio further to 50%, like Singapore is doing.

No matter what the proposals are, there will undoubtedly be arguments against them. Economically speaking, it is not difficult to argue against any measures that prohibit free market equilibrium for the property market.

However, economics always fail to take into account factors beyond pure supply and demand dynamics, and this failure has been manifested in various ways throughout the years, often leading to major catastrophes like housing market collapses, a la those in the US and Spain.

And, if we can recall how prominent economist George Arkelof described the reason behind irrational decision-making by economic agents due to asymmetric information in his classic article The market for lemons in 1970, then perhaps we can understand why an equilibrium in the property market takes so long to be achieved, such that an intervention is required to ensure that it does not lead to even bigger problems in the future.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd.

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