Sunday, July 10, 2011

Klang Valley Property Bubble?

The property price across Malaysia especially Klang Valley has doubled since 2009. Yes, in my view, it is definitely a bubble. The question is when this bubble is going to burst?

What causes this bubble? Based on my observation, the phenomenon happens this way:

During the economy crisis, the banks in Malaysia were skeptical on corporates or enterprises borrowings. While the Bank Negara monetary policy has reduced the interest rate and SRR from nominal 4% to 1%, the focus has been switched to consumers borrowings. Hence, easy credit on property loans has taken place. The banks are aggressively looking for consumers loans, and the loan package has been never that attractive before, i.e. BLR - 2.3%, 3-year or shorter period of locking period, etc. 
In 2008, the property market has hit its rock bottom. Developers started to introduce 'developer interest-bearing scheme'. Under this scheme, all the interest during construction will be absorbed by the developers. Believe it or not, the interest has already factor in the selling price of the properties. Such practice does not benefits the home buyers, but has caused the price hike in properties.

With easy credit and developer interest bearing scheme, developers are selling hope to the buyers with the myth of properties price will only goes up, and buyers will make profit upon completion. Yes, the story has convinced many of us.

To ensure good take up rate, the property is launched by several phases, and the price is increased by 5-10% with the launches of new phases. For example, phase 1 is taken up by only 50%, to improve the sales of phase 1, phase 2 price is indicated to be 5-10% higher than phase 1 with same specifications, and instead of launching the phase 2 right away, there will be many round of so-called pre-lanch and soft launch. The same trick apply to all the subsequent phases as well. With this method, the developers are also testing the limit of price acceptance of the home buyers. I am not sure if you still be able to make profit in buying new property now, but surely the developers are enjoying fat profit margin out of us.

Come back to the major concern. Is the Klang Valley property market a bubble?
If the answer is YES, the market shall crash between 2014-2016 because most of the properties will be completed with CF ready then.

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