Shitty Property Prices In Malaysia Part 1

A more appropriate title would be shitty property prices in Penang and Kuala Lumpur but anyway, there was a recent article by NST regarding affordable housing.

"In 2009, the average house price in Kuala Lumpur was RM390,000, almost six times the average household income. It was even worse on Penang island, where the average house price was RM540,000, or eight times the average household income."

Why is this in important ratio? The price-to-income ratio is perhaps the most commonly used ratio to judge whether a valuation is too high. The internationally accepted ratio is 3-4. Most of us know that the median monthly household income is RM4000 but as an urbanite say in Penang I will put it as RM6000 to RM8000. Therefore you can put a fair value on a middle-class home (2-storey terrace or a 1,500sq ft condo) at RM288,000 to RM384,000. The current prices of RM550k to RM700k pushes that ratio like as reported 8 times the average household income.

Let's look at another ratio known as debt-to-income ratio. A good rule of thumb is to use a ratio of 0.3 for housing loan. Taking back RM6000 and RM8000, a family could afford to pay RM2000 to RM 2667 in monthly installments. Just punch in this figure into the Home Loan Affordability Calculator with 5.5% interest and max loan years (30 years). Waalahh...you have an affordability range of RM350,000 to RM470,000. By combining the PI ratio and DI ratio you get a fair value of RM425,000 for a middle-class housing. Anything above that is speculative and bullshit.

Just take a look at how the US subprime crisis developed.

Like many other bubbles, one of the most important reason is easy credit and that is fueled by one factor called greed. Banks are now willing to lend up to 95% financing (oh gawd), they also offer variable rather than fixed-rate loans to reduce initial installments which is extremely good in a low interest-rate environment. Some even offer to stretch the loan tenure to 40 years! And recently heard offer for two-generation loan (70 years) and I am not lying look here, Japan did that last time and now still experiencing a recession for a decade dubbed the "lost decade".

When I speak to family & friends regarding housing price, the first thing in their mind are that house prices in Penang will always go up, at least 8/10 of them will mutter this. With some experience in the stock market, let me point this out. When everybody and I also mean the aunty in the market selling eggs says it is going to go up, it is a sign of bubble. You want to know why? The impression that money is easy to make. Take a real life example: SP Setia with their tagline your home is your "island of dreams", a reputable developer with no nonsense quality.

Say a property was bought at 700k and sold at 800k. Assumed you can secure a rock bottom loan of BLR - 2.3% during 2008. Household income at RM 8,000 (my max for an average urbanite in Penang). So the bank was offering 90% margin, downpayment was RM70,000 (pure cash). Now with 2.9% p.a. interest, served bank interest of RM 35,960 and forget about the exit penalty for early settlement. Profit at RM64,040, walao lee.

ROI: 64,040/70,000 = 91%

This is LEVERAGING at its best especially at low interest environment & superb financing margin.

If sold at RM 750,000, you can still profit RM 14,040 - BUT - ROI is 14,040/70,000 x 100 = 20%. Still not so bad laa, 20% is better than aboi's 15% p.a. stock returns.

What about when the property price jumps from original RM 700 k to RM 1 million in just months. The potential profit is even more drooling, RM 264,040 or ROI of 377% over a period of 1-2 years. Who don't want lee??? Why wait?? Join the fun la.

Can you see why people get greedy easily and why this there is great temptation to get into this boat? Just flip the prices for 3-4 times enough la and then exit. The truth is, it is hard to exit when your ego takes over and every single bit of rational evaluation goes away. Same thing happens all the time in every asset class, from stocks to commodities to even property. The trouble with property is that it is an illiquid asset class and it takes years to form a bubble (maybe 10 years or so) before bursting unlike the stock market.

Foreign people are buying. Come on la, these buyers are speculative, simply go to any high-end condo and see how many vacants are there. Like Dali said, if you can find 50% occupancy rate, call me and tell me where! Locals won't buy from foreigners so their best bet is to offload to another foreigner. But I heard that Malaysia are among the few countries in SEA that allows foreigners to buy landed property only if priced above RM500k which explains why more and more developers have this min price bracket if not higher for the new launches.

Malaysia still relatively cheap compared to rest of Asia. Property prices is kind of a reflection of the people's earning power in that country. If you compare like this you saying that my salary of say RM5000 will double or quadruple because it is lagging to Singapore which is so far ahead of us. Duh!

Penang is an island and therefore has limited land just like HK and Singapore. Have you ever examined the topography and population of these two islands and compare it to PG? HK you have 7mil and SG you have 5mil. PG is 1.5mil and yet we still have land. Land? Where? West side of the island and mainland. A big factor is population and it needs to be cramped. Look at PG, we have more landed houses vs skyscrapers unlike HK and SG. Learn to use google earth.

Certainly it takes times to see it burst or a correction but I can say for sure it is coming whether that will be a hard landing or a less painful one we will never know as it is not easy to make a prediction. House prices will hardly fall unless you see people start losing their jobs OR when you can see a young fresh graduate able to afford a RM500k property without any help from their parents, then you can shoot me back and say that prices are affordable and it will go up higher. Houses in PG are already 40% to 70% overvalued. It took the US 50% to burst. You tell me, is the end near?

Almost all other valuation matrix (besides the PI and DI ratio I showed you) in each category of house in PG will put them as overvalued and I will show you this in Part 2. Meanwhile this a a good article on Why Malaysian Real Estate Is So Cheap.