Anticipating a drop in property prices?
Despite many reports that predicted the market to crash by mid 2017, the market hasn’t
Property prices are at a high at the moment, we can’t deny that. Compared to just 5 years back, prices have nearly doubled and sizes have become smaller as developers too are struggling to accommodate large built-up sizes to maintain a rather ‘unaffordable’ affordable pricing.
The “priced out” generation believe a crash would return prices to sanity. But they are pitted against those who say the whole economy will come crashing down with the property market. So who’s right?
I would like to make one thing clear. The likelihood of a property crash in Malaysia remains low. Despite the drop in Ringgit value, Malaysia still remains a densely populated land with near full employment, where money can be borrowed at historically low rates. These tend not to be conditions in which asset prices suddenly implode.
But it would be dangerous to completely rule out a property crash. The reckless early 1970s Barber boom in the UK, when house prices doubled in just three years, was followed by years of real price falls, albeit masked by the stagflation of the time.
According to many media reports along the year, it has been reported that the market is looking towards that direction at the moment as buyers cannot afford to buy houses anymore, there are too many unsold units in the market and reports also stated that property prices are expected to drop by 30 per cent.
Despite all these reports that predicted the market to crash by mid 2017, hasn’t happened and I believe personally that it wouldn’t.
Though, some people are actually hoping for a crash so that it would be easier to buy into the market. If prices were to fall by 30 per cent, a RM500,000 home would only cost RM350,000, making it easier for people to obtain a home – or so they think!
If the property market were to crash, there would of course be no tears for the estate agents and buy-to-let merchants wiped out by a property crash. But the collateral losses would be unbearable. Banks would halt lending, not just for property but to the wider economy. Households would halt spending, as they rebuilt their personal balance sheets by saving as hard as possible to reduce their debts.
What does this mean? If you have households reducing their spending, that slows income growth through the economy, which presents risks for unemployment. If households are not confident in where things are going, they won’t spend as much and that will have flow-on impacts to other sectors and other industries.
Not only would plummeting house prices ravage consumer confidence and consumption spending, but they would hurt hundreds of thousands of small businesses who unofficially use their home mortgages as a backdoor way to finance their businesses.
Well anyways, as much as I agree that the property market is rather sluggish at the moment, I personally do not think that a crash is coming anytime soon.
2018 does look like a tough year as developers and homeowners would find it hard to find buyers, and this could lead to a crash if consumers do not have the financial power to own homes. However, although the market was sluggish throughout 2017 and that the stock of unsold houses could possibly increase in 2018, some projects priced under RM500,000, as well as those above that price range in popular locations, are still enjoying good take-up rates.
Malaysia’s economy is projected to grow between 5.0 per cent and 5.5% per cent next year. Furthermore, there have not been any major retrenchment exercises, compared with a couple of years ago, when thousands in the aviation, oil and gas and finance industries lost their jobs. To note, there has also not been a significant rise in nonperforming loans (NPLs) or a substantial rise in foreclosed properties put up for auction.
NPLs will go up only if borrowers are facing financial difficulties in servicing their loans and this will only happen if their businesses go bust or if they lose their jobs.
The latest economic data available revealed that the employment situation as well as the outlook for the business sector does not appear to be so negative. This should provide overall confidence to investors and should support a stable property market.
In terms of a property price drop, in reality, developers can’t afford to bring prices down because their margins are low, and would be more likely to change their products to meet the market’s requirements rather than just drop prices.
They would opt to build smaller units of include less finishings and eye candy. The only way developers could and would lower their prices is if the authorities lower compliance cost such as levies, taxes and affordable housing requirements.
In Malaysia, the demand for housing continues to persist and would continue through 2018 as well and consumers will always find ways to buy a home, whether through finding additional income sources or lowering their expectations of a home.
In my personal opinion, I don’t see prices dropping more than they already have. When the market was at its peak some 5 years back, some developers set ridiculous prices and when the market slowed down, they dropped their prices a bit. Do you think that this little drop in price is an actual price drop or merely developers slashing their inflated prices?