Malaysia's property glut - treat cause, not symptoms

In its address to economic and financial developments in the third quarter of 2017, Bank Negara Malaysia has pointed out that there is currently a property overhang in the market, with 130,690 unsold units as of the first quarter of 2017. Out of the unsold units, 83 percent are above the RM250,000 price range. It is also notable that 61 percent of the unsold units are high-rise apartments.

The overhang shouldn’t come as a total surprise to many as Malaysians have long complained of property prices skyrocketing over the past few years.

The increase in property prices is due to speculative investing as well as the surge in the number of developers jumping on the bandwagon for the past few years, whereby the government’s and bankers’ responsibilities cannot be absolved.

The phenomenon of property glut prevalent today did not get better despite the many developers’ efforts in pushing sales which include rebates and lowered down payments.

Another main reason that has contributed to property overhang today is the badly impaired purchasing power of the people. No further explanation needed for anyone to understand the dire economic situation Malaysians are in right now.

The oil and gas crisis, GST, ill-performing Ringgit, bad market impressions due to the country's financial scandals and persistently increasing unemployment rate have drastically reduced market activities and people’s disposable income.
Compounded with rising property prices, many were left with no choice but to turn to affordable housing or continue renting. This explains why properties over RM250,000 became unattractive and unaffordable to many - people simply can't afford them.

What are the potential effects of property overhang to Malaysians? Is this a temporary issue? Does it lead to other issues? Can we solve the problem by reducing the interest rate, lowering down payment, or making financing easier to people?

All completed but unsold units, regardless of the margin imposed, will eat into developers’ book due to depreciation and their continuous obligations to financiers. Naturally, without sales, developers have the tendency to lower property price to match market’s demand.

This could potentially damage neighbouring properties prices, irrespective of how much the property price was inflated in the first place.

Another more likely immediate outcome is for developers to hold on to unsold units because it is their instinct to resist giving out large discounts when the holding cost is still manageable. But if the situation persists, the developers will soon find it difficult to service its finance cost and will face cash flow hiccups.

Another ticking time bomb is the potential panic dumping of properties when sellers from the secondary property market cannot or decide to not hold on to their properties any longer. While property prices are generally downward resistant, speculative investors who are profit-oriented are more inclined to dispose off their units when they expect a downward trend of property demand and prices within their portfolio timeline.

These could lead to a spillover effect on the property market and potentially be disastrous to Malaysia’s financial market.

What’s oversupplied are not properties, but in fact, expensive properties. The supply of properties that are affordable to people does not match the demand.

According to Khazanah Research Institute and Bank Negara Malaysia, the sign of a well-functioning affordable home market when the median price for the housing market is three times the gross annual household income.

As the median monthly household income of RM5,228 in 2016, what would make a house “affordable” is a price range of around RM188,000, way below the price of most property units especially in Klang Valley. While affordable houses are being built, careful implementation of financing scheme and timely completion of construction should be prioritised.

Traditionally, efforts to ease the loan application or criteria for foreign property buyers to purchase properties in Malaysia will be done. However, what’s more important is that the government must treat the cause rather than the symptoms.

The government must realise that to solve the oversupply of properties are not to source for buyers to buy the unsold units, but to address the issue that our people cannot afford to own a house with the current economic state and income level.

The pricing of properties as well as sale of properties to foreign investors should be placed under greater scrutiny so that it does not result in the ballooning of property prices.

As mentioned earlier, property prices are generally downward resistant - even when there is more supply than demand. In the property market, the rule of supply and demand does not really apply in the way we expect them to. What happens in reality is that if property A costs RM500,000 today, and a developer decides to build property B that is largely similar next to property A and prices it at RM600,000, price of property A will adjust upward accordingly, regardless of whether all units in the project property B belongs to are sold out or not.

While the pricing mechanism of properties are based entirely on the developers’ decision, marketing strategy and market perception, the government can play a greater role in regulating the cost and margin, as well as discouraging speculative purchase (and speculative building).

To complete the picture in solving oversupply in properties, what must be discussed is the demand a.k.a people’s purchasing power. It’s not enough when the government keeps telling the people that the Malaysian economy is doing well and that GDP growth is encouraging because most Malaysians are struggling to make ends meet every day.

When wages and salaries are almost stagnant for the past decade while the prices of commodities continually increase, the people’s anger cannot be contained by words of affirmation from the government. The increase in property prices is not the only sector that is outstripping the growth in the real income level of many Malaysians.

It is time for the government to look into policies that can improve people’s wealth and purchasing power, rather than making it easier for people to incur more debt just so unsold properties can be taken up at the expense of even more expensive properties in the future.

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KERK CHEE YEE is political secretary to DAP Parliamentary Leader Lim Kit Siang.- Mkini