Malaysia's ever-rising house prices

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Petaling Jaya (The Star/ANN) - Last week, three Singapore government ministries put their heads together and initiated a slew of measures to curb property prices in the city state. It was their seventh round since 2009.

Maybank Kim Eng analysts Wilson Liew says it was the "most comprehensive". The Wall Street Journal reported DBS Group Holdings Ltd CEO Piyush Gupta as saying it was one with "a lot of teeth" while Credit Suisse says the timing was "a surprise" as the previous round was only three months ago.

House prices in Malaysia have not seen the robust growth witnessed across the causeway and in all likelihood we never will but the events in neighbouring Singapore bring into focus the importance and the repercussions that can occur if house prices are not kept in check, professional real estate consultants say.

Among those who have highlighted the disparities in the sector time and again include Savills Rahim & Co executive chairman Abdul Rahim Rahman and Khong & Jaafar group of companies managing director Elvin Fernandez.

Runaway house prices like hyper-inflation, also known as double-digit inflation exert extreme economic, social and political toll on an economy. Since 2009, the property sector has seen contrasting and confusing forces at play.

Consider the following two cases. Their stories are real. Only their names have been changed to protect their identities.

Andy, 42, is in the midst of buying his first house, an 800 sq ft apartment in Klang, for 145,000 ringgit (US$48,124). He and his family have been renting a single-storey house in Klang for 10 years at 500 ringgit a month.

"My parents' greatest fear was eviction by the landlord but since we were renting from a family friend, this issue did not arise. After searching for a year, we found this apartment which is affordable. It was also well maintained and clean," he says.

He did not look actively for his own place until the floods became more frequent last year as cleaning up after a flood was no picnic.

On a personal level, Andy also did not like debts. After paying off his car, he was ready to take on another long-term commitment.

With a 58,000 ringgit cash downpayment, he took an 87,000 ringgit loan. He has committed himself to pay slightly more than 400 ringgit a month until he is 70.

Andy's colleague, May Lin, is about to buy her third property with a price tag of 740,000 ringgit. May, 34, bought her first property jointly with a sibling three years ago which cost them more than 500,000 ringgit. Her second property costs another 500,000 ringgit. Unlike Andy, May Lin has other sources of income.

Affordability

Like many investors who have bought multiple properties, she wants to take advantage of today's low interest rate regime.

"If you are going to buy for your own stay, you pay as much as you possibly can. But if you are a property investor, you take as high a loan as you possibly can to maximise your returns," says the savvy investor.

The differences in their stories underscore the disparities and discrepancies in the current property market.

Malaysia is experiencing one of the lowest interest-rate regime ever, and the status quo is expected to remain until there is more clarity on the national and international front. As a result of a slow global economy, Bank Negara said last November that it would maintain the overnight policy rate (OPR) at 3 per cent to sustain the resilient domestic demand.

However, while cost of funding is perceived to be low, house prices remain unaffordably, and stubbornly, high with each subsequent developer's launch.

The fact that affordable housing is now priced from 400,000 ringgit onwards is an indication that something needs to be done, and soon, says Savills Rahim & Co executive chairman Abdul Rahim Rahman. His concern is the shortage of affordable housing and he says the country needs more than 1 million units priced between 100,000 ringgit and 400,000 ringgit.

The days when a first-time house buyer is able to buy a unit below 200,000 ringgit in the Klang Valley is fast diminishing because developers are building for those who can afford to pay, says an analyst who declined to be named. The first-time house buyer has to begin at (what we used to consider as) the high end (at 500,000 ringgit and above). Anything around 500,000 ringgit is considered affordable, he says.

PPC International Sdn Bhd managing director Siders Sittampalam says affordability refers to the amount of fund or capital available for an individual in relation to property prices.

"Malaysia household income debt ratio is relatively high; 55 per cent of the households are burdened with a third of their household income going towards the payment of their property and car loans.

"An average house buyer in Greater Kuala Lumpur who earns 5,000 ringgit a month would need to pay about 3,200 ringgit if the terraced house costs 600,000 ringgit, with a 25-year loan tenure at 5 per cent loan interest with a 10 per cent down payment. This is about 65 per cent of his gross income, which means he is not eligible for that loan."

Siders says the income to pricing ratio, a primary determinant to access affordability, is relatively low in Malaysia.

However, he says it is usual to experience high property prices in highly urbanised areas, which is what we are seeing in the Klang Valley, Penang and of late, Johor Baru.

"We should instead look at property pricing in other towns like Kajang, Rawang and Nilai where a double-storey terrace house is affordably priced at 350,000 ringgit and not (just focus) on housing in the Klang Valley, Penang and JB City."

"There is no necessity for the working population to stay within city limit, (only to) pay expensive prices. They can stay in outer cities and commute to work. The problem is not insufficient housing units, but a mismatch between demand and supply, both in terms of pricing and location.

"Therefore, curbing property pricing through fiscal measures interferes with the free market movement and will not resolve the affordability issue in totality," he says.

Despite the measures instituted by the government, interest in property as an investment continues to be high. The past year, developers and agents are seeing something new people walking away from a purchase because they are unable to get the amount of loan they need to go ahead with the purchae.

Henry Butcher's Tang Chee Meng says that unlike before, a potential buyer putting down that initial deposit need not necessarily translate into a sale.

"They may like the project and may make a booking, but they cannot get the amount of loan they want. They ultimately pull out."

The number of potential buyers who walked away has doubled the past one year, he says.

In January, 2012, banks began processing loan applications based on net income after income tax, Socso and other loan commitments. Prior to this, it was based on one's gross income. In 2011, purchasers of third and subsequent property also had to put a 30 per cent downpayment.

This has resulted in buyers jointly making a purchase; sometimes with a younger person in order to leverage on the younger person's earning capabilities. This is known as second generation lending. Another alternative is to stretch the loan repayment way past retirement, as in Andy's case, until he is 70.

Tang says there is a shortage of supply in relation to what people want and what's available. "It has to be the right location, the right pricing, and the right type of property. The landed primary market is strong, but much of the interest is limited to those which are under 1 million ringgit."

Tang says today's uncertainties are broadly categorised into the impending general election and global uncertainties. There will be more "clarity" after the general election is over. His views concur with developers. Four out of five participants say the slow sales was due to uncertainty surrounding the general election.

The super rich

While there are genuine buyers like Andy and investors like May Lin, there is another group of premium buyers, both local and foreign, that developers are courting. A Knight Frank Second Half 2012 report says an increasingly popular trend in luxury housing is the branded residences concept whereby developers tie up with international luxury hospitality and lifestyle brands to set a new definition to luxury living. Hotel-like services such as concierge, security and room service provided by a luxury brand help to maximise the value of a development.

"KL City is certainly getting a fair share of this new residential concept evident from the success of Banyan Tree Signatures Kuala Lumpur (441 private residences) which were sold out at an average pricing of 2,000 ringgit per sq ft. Other notable luxury brands coming on-stream include Four Seasons Place, W Kuala Lumpur Hotel & Residences, Ritz-Carlton and Harrods Hotel and Residences.

W Kuala Lumpur Hotel & Residences along Jalan Ampang will have 150 rooms and 353 units of residences with indicative pricing of 2,000 ringgit per sq ft. W Kuala Lumpur Hotel will be managed and operated by Starwood Hotels & Resorts Worldwide Inc while The Residences will be managed by Dijaya Corp Bhd, report says.

Ireka Corp Bhd has also unveiled a mixed-use development, called The RuMa Hotel & Residences. It will have an estimated gross development value (GDV) of 635 million ringgit comprising a 40-storey tower with a 263-room boutique hotel and 200 serviced residences.

Eric Chan, the deputy managing director of Eastern & Oriental Bhd, who unveiled the newly completed E&O Residences and St Mary Residences last December says the property sector has become international with buyers looking for brand.

"History and pedigree are no longer enough. If we want to sell to the international market, we have to work on this," he says during an event to promote the company's entry into the hospitality industry in Kuala Lumpur with its E&O Residences located on the same site as its St Mary Residences. The company's hospitality interest is Lone Pines Hotel and flagship E&O Hotel, both of which are in Penang.

Risk premium

McKinsey consultant Subbu Narayanswamy, who has been working with developers in the Middle East, Singapore, China and Vietnam say the property sector is one of the most volatile sectors in an economy. "People tend to talk about their successes, but not their failures. The sector has suffered the most severe downturn since 2008, its worse in the last 100 years but four years after 2008, many companies have recovered. For some, they have moved passed their pre-2008 peak. A feature of the property sector is its volatility," says Subbu.

On Malaysian land prices compared to other countries in the region, Subbu says Malaysian land prices are low.

"The returns are also comparatively low. The profit margin in Malaysia is about 20 per cent; in Hong Kong it is between 50 per cent and 60 per cent. Investors will not invest in a proejct if there cannot get a minimum 30 per cent because anything can go wrong.

Subbu says while there are much gains to be made, in the downturn, there is also a lot blood lost.

The gap between needs and wants as in social housing vs super high-end market is great and the risk involved when buying a house can be seen in today's auctions.

The last several years, the number of auctions have grown to an extent that it has become an industry. There are more auctioneers today than ever before. The types of housing that end up under the hammer is so diverse today.

The auctioneer's list initially started with pigeon-hole like houses that cost 10,000 ringgit or less in faraway places like Rawang, Nilai, Bukit Sentosa and Bukit Beruntung.

Today, while low-cost apartments continue to flood the auctioneer's list, condominiums located within the vicinity of the KLCC priced at about 2 million ringgit have joined the line-up.

It is this fragmented state of affairs that draws concerns from property professionals, developers and the authorities.

Says Subbu: "In any economy, there is a need for balance between high-end housing and social housing. In the case of social housing, it comes under the government's purview.

"Land is one of the ways for money to made. The Government can sell land and charge high prices which means developers subsequently sell at high prices. But the money made by the government is ploughed back into social housing and other infrastructure. That is the model being used in most countries.

"The trick is to generate money and to plough it back and at the same time make money through the granting of approvals, and taxes," he says.

*US$1=3.01 ringgit

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