I met a relative recently and he was gushing excitedly about how his property, a double-storey link house, has appreciated in value. "Someone just offered me RM500,000 for my house, can you imagine that?" To this, I replied, "Yes, but would you be able to sell it and upgrade to a better house in the same location?"
He fell silent.
'Paper gain' can sometimes give one a false sense of wealth. As long as he cannot afford to upgrade to a better house after he sells his current one, there is no change in his lifestyle. In other words, the gain on his property cannot be realised, hence it's considered paper gain. In theory, he could leverage on the property appreciation to get additional bank loans to pay the down payment on a second property. But that would be a risky thing to do given the economic uncertainties.
There has been a lot of talks recently about property values being artificially inflated and there is actually a whole set of dynamics at work to keep prices high. There is no shortage of "good news" in the mainstream media telling us times are good and property prices will continue to climb. CIMB Research, for instance, recently announced that residential property prices will go up by between five and 10 per cent this year.
On the other hand, HwangDBS Vickers tells us that mortgage approvals and applications in February were respectively 27 and 18 per cent lower than last year's peak due to weaker consumer sentiment, heightened economic uncertainties and stricter lending guidelines. So who are you to believe?
Some investors are driven by fear of being left out if they do not jump onto the bandwagon now, hence the excitement during property launches despite poor rental returns. YTL recently announced that their latest phase at Lake Fields, comprising 285 units and priced between RM969,000 and RM1.7 million, were sold out in one day.
"Positive sentiment" is also fuelled, no doubt, by the slew of goodies dished out by the government- from zero increase on petrol prices to lowered highway toll charges. But that's just because general elections are around the corner. Most of these incentives are reversible, by the way.
Talking to property agents on the ground, most will tell you that there is a general slowdown in transactions or actual properties changing hands, as many are waiting to see the outcome of the elections before making any decisions.
Before you decide to jump onto the bandwagon, ask yourself some basic questions. Is Malaysia's per capita income increasing in tandem with property price increases? Are rentals going up? Is there a shortage of land in Malaysia given its population density? And if you are buying to rent out, will you be happy with the rental returns?
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