Of bubbles, declining prices and mortgage defaults rising. (It’s a cycle)

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Source: housingwatch.my (A BNM website)

After years of cooling measures recommended by the Bank Negara and even responsible lending policies by all the banks, the average home price increase in Malaysia is actually dropping for most states except for Johor. Take a look at the image showing the Q1 2017 versus Q2 2017 and vs the average for the past 26 years. Average numbers anyway. Do note that some areas in Greater KL has seen drops when we look at prices in 2016 versus currently for example. Bubbles form when prices move up way too fast and if it suddenly drops a lot because no one would afford those prices at the top, we say that the property bubble has burst. So, is the property bubble about to burst then? Usually when the bubble bursts, the mortgage defaults would start rising. Perhaps there are more auction of properties from the banks in this case. Okay, enough about Malaysia’s not-so-advanced property market. Let’s look at Australia’s.

This is the full report by nationalmortgagenews.com.  It says that the real estate market of Australia is not going towards the housing bubble territory.  However, home prices continue to decline and mortgage defaults are likely to rise.  (Actually, I do not understand why when home prices decline, the mortgage defaults may rise unless of course some of these owners lose their jobs for example. Anyway, please read on)   These happenings are actually a cycle… Carrington Mortgage Holdings Executive Vice President Rick Sharga said, “It’s interesting to watch the dynamics of the market. What we see is prices rise, sales activity slows down, prices weaken and then sales pick back up.”  (Okay, this one is easy to understand and shows the usual logical way how the property market behaves as long as everyone keeps their jobs and have salary ups every year) 

Continuing with the article,CoreLogic Chief Economist Frank Nothaft said that even though some housing markets are overheated but, “it doesn’t mean necessarily that tomorrow or next week or next month or even next year prices are going to crash. But it’s prudent being a little more cautious about investments in those metro areas.” (Please understand his statement carefully. There are already housing markets which are overheated. Even in Greater KL, some condos are already priced above what senior manager couples could afford. Do note though that for some wealthy businessman, they are usually not that interested in sub RM1 million properties. Buy cautiously would be better. I think he is saying the same thing for the Australian property market too)

Next would be a historical comparison by CoreLogic.  CoreLogic’s comparison of 380 metro areas in January 2000 showed that 6% were overvalued while 87% were at value. But by November 2006, 67% were overvalued and 32% were at value. At the bottom of the market in March 2011, 7% were overvalued, 42% were at value and 52% were undervalued. As of December 2017, there was a more even distribution among the three groups: 33% overvalued, 35% at value and 32% undervalued. (Going by Corelogic’s numbers, it does seem that everything’s better distributed but that 33 percent overvalued is still pretty high.)  Well, do read the rest of the article here. 

I think it’s good information to know what people should be looking at when it comes to the property market. Always learning how these experts are assessing the market allows us to also assess our own backyard better too. Three things we learnt here I think. When the market is overvalued, it meant that prices are beyond the affordability of many. When that happens, buyers may not be able to buy and the market slows. Prices would adjust themselves and after a while, buyers start buying again. Within one property market, there would always be overvalued, undervalued and even fairly valued properties. We just need to be aware of them so that our decisions are more of a calculated one. Last but not least, we must not see Malaysia property market by itself but rather understanding how the more advanced property markets are moving and being evaluated. Happy learning.

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written on 1 April 2018

Next suggested article: 90 percent fear future generations won’t be able to buy a home

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