Sunday Lite: Flip Flop In Malaysia's Property Market

Source material:
http://www.establishmentpost.com/malaysia-property-flipping-ugly-effect/#ixzz3gnWGEUdE

Malaysia Property Flipping and its Ugly Effect

• It was the lure of fast and easy money, lots of it, that made James Lam jump at the chance to be a Malaysia property speculator or property flipping. 
• “I was greedy.” says the 53-year-old who is in the top management of a multinational company. He already has a well-paying job, but the opportunity was too good to resist.
• One way of beating the system is to secure loans for several properties from as many banks all at the same time.
• Once Mr Lam gets the bank loans, he has to make sure he sells the properties quickly and at a higher price before the loan repayment commences. He has a small window period of a few months to get this done.
• But this did not happen for the two properties in a prime area in Kuala Lumpur that he now has. “I cannot get a buyer. Not even a tenant (to rent). I have to start paying the banks for the loans with my own money.” 
• He also realises that the property market is slowing down and his chances of selling these properties off is getting slimmer by the day. With Real Property Gains Tax made steeper in 2014 at 30 per cent for properties sold within three years, he would need to have a huge profit margin to offset the tax.

My comments : 

Indeed it has slowed down. Besides the house price index the number of property transactions has also fallen. If you don't believe in numbers just head to any property fair in town and you can count the # of visitors with your pair of hands.

The mighty flippers may flop

• Situations like this are nothing new to Siva Shanker. He has seen loads of such cases and he does not see a rosy end to this tale. 
• His 34 years of experience as a real estate agent tells him that Mr Lam will either start cutting down his expenses so he has spare money to service the banks loans until a buyer comes along. “Or he will start borrowing from relatives or, worst still, from loan sharks.”
• “A sharp rise in value (of properties) creates the flipping culture,” he tells The Establishment Post. “In 2010, 2011 and 2012, thousands of properties were sold to flippers. These are people who neither need the property nor can afford to buy it. They buy it purely on speculation,” adds Mr Shanker, the immediate past president of the Malaysian Institute of Estate Agents.

Getting the DIBS on Malaysia Property Flipping

• One of the reasons for a huge rise in flippers is the Developer Interest-Bearing Scheme (Dibs) where a house buyer need not pay down payment upon signing of the sale and purchase agreement. 
• The developer will also bear the other expenses like stamp duty, legal fees and also interest on finance during the project construction period until the handing over of the keys. In essence, the buyer only pays for 90 per cent of the property value. In Malaysia, down payment for properties is at 10 per cent.
• But speculators do not realise is that the value of properties sold under Dibs are actually marked up. This artificially hikes the property value and has caused the property market to rise unnaturally. 
• Dibs was scrapped in Malaysia Budget 2014. Bank Negara was forced to take this measure when household debt soared to 86.8 percent of gross domestic product in 2013.
• But the worst is not over. The effect of Malaysia property flipping is going to hit the property market in a bad way, according to Mr Shanker. “We will see a new category in property transactions – properties from flippers.” Presently, all property transactions involve the primary market, which are the newly built units, and the secondary market, which are the houses built and bought long ago that have now been sold.
• He feels this category of property transactions will constitute a sizeable “5 to 10 per cent of new stock”. Flippers may be forced to sell their properties at much reduced, or even lower than the purchase price, so not to be saddled with a property they cannot afford to hold. 
• So when a sizeable number of properties are made available in the market at much reduced prices, it is not going to be pretty for property investors and owners.

My comments : 
Everybody knows Malaysia has the highest household debt to GDP ratio in Asia. Below was taken in 2013, it is even higher now. 

House prices are lagging indicators of the economy (& our economy is not doing good) simply because it is illiquid (you can't sell it as fast as selling off shares). I told a couple of folks that the year it's going to be is 2017 and I still stand by it.  

At present economic conditions, BNM will not raise interest rates. It cannot and will not. [1] Lower interest rate is needed to spur economic borrowing and spending during bad times like now. [2] An increase in the rate will burden borrowers, make credit harder to obtain and certainly will mean bad news for property as it based highly on leverage.

This is why the Ringgit will continue to weaken and there is nothing much BNM can do about it except to smooth the decline by burning more reserves.

Elsewhere, property flipping is losing its appeal

• Property flipping is fast becoming a thing of the past in the West. “China, Singapore, Malaysia, Hong Kong are now where the West have been and gone through,” Vijay Manavalan, a property negotiator in Malaysia involved in promoting properties in UK for investment.
• “To get value out of property investment, it is best to get slow income, and not flip. There will not be many more markets around the world to flip. Investors need to look at the rental income that can be generated,” he tells The Establishment Post.
• With a combination of government measures and diminishing opportunities, Malaysia property flipping may just be a thing of the past and Malaysian property market can be allowed to grow naturally and at a steady pace.