More than a dozen years ago, Penang property prices were climbing and speculators were diving into the property market.
Then the unthinkable happened, and the property sector slumped during the Asian financial crisis. The country/state suffered from a property overhang for a number of years.
Today, the stakes are higher as property prices have soared beyond any semblance of rationality. Unbridled speculation and easy credit over a longer period have added to the illusion of demand for property. Alas, once again, some people think that Penang is immune to the vagaries of the regional and global economy. Memories are short and we appear to have learned no lessons.
Let’s look at ringgit and sen: For a home-buyer to purchase a property costing close to RM400000, they would need to pay over RM2500 in monthly loan instalments over 25 years. To be comfortable repaying such instalments, you would need a monthly household income of around RM8000 (gross before income tax) especially if you have a young family. What proportion of the population has that level of household income?
And why would Penangites living abroad return to buy houses in Penang? Is our quality of life that high? Do we have green spaces, beautiful rivers and beaches, excellent public transport, affordable top-notch education, state-run universal health care coverage (say, comparable to UK and Canada), a lifestyle without stress and congestion?
Let’s face it, if you have a monthly income of RM4000, you are unlikely to be able to afford a RM2500 loan instalment – for the same reason you would not buy a BMW with such an income level even though the loan instalment may be lower than your income.
Obviously, wages have not kept pace with housing prices. The question is, how many house-buyers fall in the income range that can comfortably afford homes costing close to RM400000?
What happens if the US-led global recession (or looming depression?) hits closer to home? (Already crude palm oil prices have plunged 25 per cent since early this year.) Some companies are cutting back on costs and allowances. Indeed, long-term job security is a serious issue these days especially if you are taking out a housing loan over 20 or 30 years.
Take a look at this Star report written in 2009 in the aftermath of the 2008 recession: ‘MNCs scale down perks for expats’ What do you think will happen if a bigger global recession hits? What happens when MNCs start using voluntary separation schemes (VSS) and other euphemisms for retrenchments?
Will housing loans be as easily available then? Will banks continue to lend freely at low-interest rates in a riskier climate with so much uncertainty? Or will they prefer to hold liquidity and mark up interest rates then?
Something to ponder on.
Here are comments from one property analyst:
The government can lower interest rates for soft-landing to encourage borrowing but they cannot force banks to lend. This happened during the Asian Financial Crisis when Dr M lowered interest rates but banks hardly hit their targets of loans because they were reluctant to lend in view of a risky climate and too low interest rates. This is happening in US today. It’s what Keynes called a ‘liquidity trap’. Preference is to hold on to cash when interest rates are near zero. In the US, quantitative easing exercises to create liquidity have upped the price of commodities, jacked up inflation, devalued the greenback, pushed up interest rates of bonds – all this happening and the banks are not lending to generate new business and jobs … resulting in (possible) Depression and not just a double-dip recession.
A frequent argument is that as long as interest rates are maintained, loans will continue to be serviced. A low-interest rate regime, however, will not prompt banks to lend. Or when they do lend, the interest rates will not be attractive. Either way, when money is not loaned out or slow in coming to the market, there will be fewer economic activities i.e. job creation and employment … less spending affecting those who need to service housing loans. Thus, even if interest rates are low, there will be those who will have problems to pay because of a slowdown in the economy.
The other favourite argument is that a depression will divert cash to the property market as it is a reliable hedge against inflation. So, forever, the property market will be good. But if the equity market slides, who will have money for property?
When it is revealed there is very little purchase by foreigners in the local property market, some agents will claim that foreigners actually use locals to buy Penang houses. This is ridiculous as who would want to front for foreigners and why would foreigners trust locals? The Inland Revenue is one reason why no locals would front for foreigners.
It may not be easy to market properties overseas either given the negative publicity press Malaysia has received over a host of ‘religious’ issues.
Time to really open our eyes to some of the realities around us.