Extremely low rental yield may also mean bubble building

There are a few reasons why property bubble may burst. Here’s a few: Spotting signs of a property bubble, 3 points (Updated) Besides these few reasons, there is one which will start to inflate the property bubble. Remember this earlier article? When rental falls, so too would property price The reason why when falling rental will affect property prices is because of the yield becoming too low. When the rental yield drops to a very low level, say 1%, then the buyers will not be willing to pay the same current price. He will negotiate for a lower property price, citing extreme low yield as his main reason. If the seller refuses to budge, he will choose to move on. When sellers start to lose in some negotiations, the price would start slipping and when news get around, the prices may weaken further. Note that this would most probably not affect the usual hotspots. Reason? Prices up because of ‘location supply scarcity.’

In some cities in China, the rental yield is so low that the owner would need 100 year to get back their investment. Here’s the full article in South China Morning Post (SCMP) It says that yields in 13 cities have slipped below 2 percent. (Note that there are also many people I know here in Malaysia who is struggling to rent their newly completed units out unless they do it with a lower rental). According to the article, despite the fact that property prices in a city like Xiamen is trending downwards, the yield is still very weak,at just 1 percent. Some cities have seen their property bubble bursting. Qui BaoXing, a former vice housing minister shared that for China, the usual gauge of home price to household income is less relevant. More relevant would be the rental vs the home price. Anything above a ratio of 30 is dangerous. Xiamen is now at 100 percent while Shenzhen is 67 percent. (Yes, these numbers show danger)

I think we need to be really savvy when we are looking at properties to buy today. The first criteria for rental investment is definitely rental yield. This is the reason why buying in primary / first-tier cities tend to provide the buyers better rental yield. Demand for housing is still growing due to urbanisation. We should be worried if we are still proceeding to buy a property which is giving totally negative rental yield today. The only consolation is that if the price per sq ft is still considered low based on a 10 minute radius, then the property price should be quite stable. I think I agree that sometimes, rental vs house price is more relevant. In some countries, people would do everything they could to save their home. They believe a roof over head is a must. I think when Malaysians are faced with such a situation, they would choose to stop visiting Starbucks, cafes and even gym memberships just to make sure they do not default on the home loan payment. This is why I think property investment is going to be safe for a long time yet because we are Malaysians.

written on 8 Aug 2017

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