How to spot property bubble?

There are way too many articles about property bubbles. Your friends who has yet to buy a property has been talking about it for years. Your friend who buys many properties tells you that property bubble is impossible to happen in these few years. So, do you want to know how to spot a bubble? Actually, there are always some warning signs before any bubble. However, majority of the people are normally way too occupied with what they believe or hear to pay attention. Here are three signs.

1. Sharp and continuous house price increase

house price indexIf prices are increasing or even doubling in say 3-4 years, this is considered extremely sharp. Imagine a RM300,000 property suddenly become RM600,000 in 4 years? There is just no way that your salary would be able to catch up. Last year, the property prices in Malaysia was ranked top 12 in the world in terms of price increase. Read here: ‘12th Highest Growth in the world‘ In terms of changes for the past 10 years, it clearly shows that the prices has indeed been rising but has not shown any sharp increases for the past few years, except for certain segments in certain locations. Overall basis, not yet.

2. Affordable choices availability

This is important. Imagine you are earning RM3,000 and ALL houses are priced RM500,000 or higher. Would you be able to buy any property at all? Fortunately this is not the case. I do not want to go into the low cost flats but if we go online to any property websites like PropertyGuru.com.my or Iproperty.com.my, we could see that even at the lower range of below RM200,000 there are still many choices. Thus, in terms of affordability availability, at this point in time, we are considered safe. We do not need to look very far, just compare to Singapore. Singapore government has undertaken many more cooling measures than Malaysia. Yet, the prices of HDB Flats of 1,000sf or higher, even at the fringes are hitting S$400,000 or higher. Please do not say Singaporean earns more. Number to number, their engineers earn the same as engineers in Malaysia. This can be verified easily online as well.

3. Bad Debts?

bad debtsIf the non performing loans in the banking sector starts to increase at a fast rate or has been increasing for the past many years, I think we ought to be worried that perhaps it is no longer safe buying ever higher priced homes. Perhaps a lot of people are now unemployed and thus not able to repay their mortgage, causing their debts to become non-performing loans. If we refer to the chart by Worldbank, for Malaysia, in particular, this is not yet happening. In fact, the total non-performing loans continue to decrease.

Do note that there are no guarantee that all these signs may not suddenly deteriorate if something unforeseen happens. For example, another huge collapse of the banking system in Europe or US? At this point in time, apart from a few problematic countries in the Europe, there are no signs of that happening. In fact, America reported such positive results that the QE 3 may be stopped much earlier than expected.

If you always monitor these three important signs, there is no need to listen. You know the answer. Happy Chinese New Year and Happy Holidays!

written on 29 Jan 2014

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