VALUE & WORTH By ELVIN FERNANDEZ
An unusual ripple has taken place in a property market that usually moves at glacial speed
THREE months into 2012 and what has changed in the property market?
We had an unusually slow start this year and this was because the Chinese New Year was only a month apart from the year end Christmas and New Year holidays and this resulted in an extended holiday mood in the country.
Waking up in February, we found that the fears of a US double dip that took hold in the second half of 2011 had dissipated somewhat and the core of the eurozone crisis, namely the possible default by Greece and all its ramifications, was being tackled with some light seen at the end of the tunnel.
As at the end of March, the US economy, an important engine of growth for the global economy, is said to be improving, but there are also concerns that “seasonal” adjustments in the data are not giving us a real picture and because the growth is being wrenched out from extraordinary monetary easing.
As for the eurozone, we are told, increasingly, that the crisis is not over, albeit contained somewhat for now. All in all, we are not out of the woods as yet insofar as the global economy is concerned.
The China slowdown is now officially confirmed, but the majority of news flows suggests no “landing” or hard landing. The official policy on lowering house prices, however, is steadfast as confirmed by the top leadership.
On the local front, Bank Negara has just released its usual, annual, twin reports and they project a slightly lower growth range of 4% to 5% for 2012. The reports list inadequate global growth as one of several risks going forward, for us.
The property market, unlike the stock market, moves at a “glacial” pace and its movements are not easily discernible in a three-month period, but coming out of the holiday season this year there was a distinct slowdown in enquiries for mortgage valuations and for house purchases in the secondary market. Whether this will persist or be shaken off as due to the extended holidays will be better known only in the second half of the year.
But there are evidences that the run-up in prices for the various “hot spots” of housing in the Klang Valley and in Penang, to levels way above desired and supportable fundamental levels, have been arrested and this has been principally brought about by the cooling measures undertaken by Bank Negara and the tightening on housing loans by the banks themselves. Arrested also, hopefully, would be the horizontal spreading of similar pricing levels outside of the “hotspots” the trickle-down concern.
The housing market, on a pan-Malaysian perspective is fundamentally sound with the country-wide “all house” price, according to the National Property Information Centre or NAPIC, stated at RM212,085 for the third quarter of 2011.
Average household
If we match that against the average household income for the country as a whole, at about RM4,000 a month, the number of times the price is, compared with the annual household income, it is an acceptable 4.42 times.
In many “hotspots”, house prices are much more than 10 times average household income (for the respective states as we only have official data on a state-by-state basis).
A recent article in the Asian Wall Street journal about the Australian housing market had this to say: “Australian house prices are (high at) 6.7 times the median household income, more than double the level in the United States.”
In the primary market, sales are increasingly being driven by new inducements for sales, that commenced, post the global financial crisis, with the 5/95 schemes and delayed payments that those schemes offered.
The market has gone further and now rebates, early bird discounts, cash back payments, Developer Interest Bearing schemes (with the developer absorbing interest payments during the period of construction), absorption of cost of the sale and purchase agreement, legal fees and stamp duty (borne by the developer) and rental guarantees, are common items now.
Most of these are de facto price reductions and that seems fine, except that loan approvals should be based on valuations that are arrived at by making comparisons on a like-for-like basis, i.e. stripping out the value of the inducements to arrive at the “effective” price and then making comparison-based valuations.
Rental guarantees could be more pernicious, especially for strata offices and retail space. Some schemes are being built and sold solely on marketing the individual units to various purchasers at prices that are built in with future rental guarantees. These guarantees can, in instances, be longer than five years and the guarantee is from the developer, and not necessarily backed by a financial institution.
If end financing is given for these schemes based on comparing prices with prices of similar schemes (also inflated due to the rental guarantees), there is a real danger that the loan gets predicated not on the real value of the real estate but on the value of the real estate topped up with the substantial financial benefit.
Risks are high when such products are purchased in the headlong rush to property on the notion that it is better than lower yielding alternativesor as a “hedge” against expected inflation. From a regulatory standpoint, leaving this to the caveat emptor doctrine is not advisable.
Elvin Fernandez believes in the free market and timely nudging by policy makers and key market participants to iron out any, and only where needed, imperfections in the system. To do this, and over time, they need a steady stream of in-depth market knowledge and insight.
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