When units on my left and right are auctioned off…

Are there many units being auctioned off by the banks these days? With the slowdown in the market, many owners who overstretched themselves a few years ago due to Developer Interest Bearing Schemes (DIBS) may now feel the heat. What happens when we own a unit within a development which has just been completed a year or two ago and we start to see units after units being auctioned off to the market? Does it affect the market value of our unit? Assuming we are still able to pay our mortgages on time even if we may not be able to rent out the unit, yet?  I have the honour to pose this question to Sr. Vicky How, the Founder and Principal of Propedia Consultancy. (She’s from the same university as me! Though…. I am 10 years her university senior…)  Propedia Consultancy is a property consultant company which offer services such as sales and lease of property, property management, and valuation. In addition, she is also an invited guest speaker for special events and has been a trainer for Real Estate Agencies and also a coach.

Here’s her answer.

For owners and investors who bought properties enbloc under the DIBS schemes previously, Bank Negara Malaysia’s move to increase the interest rate by 25 basis point to 3.25% may affect them. This is because these properties purchased under the DIBS scheme are now completed and due for vacant possession but some of these property investors will be facing difficulties to service the higher loan installments.

When some of these property investors and owners default on their mortgages, this would lead to multiple properties in the same area or scheme being auctioned off at the same time. The aforementioned scenario begets the question whether the multiple foreclosures would affect the property value of other properties in the same area.

The answer is YES.

Let’s go back to the basics.  A valuer determines the value of a property based on past transacted price. Properties transacted through an auction in the high court, the land office and/or private auctioneer are still transactions that will be reported to the Jabatan Penilaian dan Perkhidmatan Harta (JPPH).

A valuer is required to analyse the most recent transacted price from JPPH and make the necessary adjustment to the value of the property. If there are too many properties from the same area or scheme which are transacted at low purchase prices, it will affect the valuers’ decisions for subsequent transactions.

The valuer will also factor in the demand and occupancy rate in the area as well as the risk factor that other properties in the same area or scheme will be auctioned off.

Given the above, it may be wiser to buy in areas or scheme where the occupancy rate and/or demand is high. Even if the property units are bought for investment purposes, as long as the property units are occupied by tenants, the risk of owners/investors defaulting leading to the property being auctioned off will be less.

— thank you Sr. Vicky How. —   Do connect and learn from her yeah. 

Let us understand that property prices do not change if there are no transactions. If there are transactions and most of these transactions are at lower prices, then the average property prices or even the median property prices will be on a downward trend. Many times, the property being auctioned off may not get any bidder for the first auction. The reason is because the first auction is usually close to the market price. Subsequent auctions would be at 10 percent lower. Sometimes, with a slow market, there may also be fewer motivated buyers too. We should also be savvy to the fact that for some popular areas, slower market does not mean anything. Any available unit would still be quickly snapped up.   Happy understanding and buying.

written on 23 March 2018

Next suggested article: Condo prices, bank valuations and neighbour’s parked cars


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