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Property prices can ONLY go up when we can afford it.

Please read the title a few times and understand its significance to the property market. There has been predictions on when the property market will rise again. Some say that it will be in 2020 or 2021. As for now, it’s consolidation time. What is consolidation? Well,it simply meant transactions continue to happen but the prices are not moving up with every transaction. Of course, predictions will differ every year and if we remember, there was also a prediction that the property market would collapse early this year (2018). Fortunately, it did not happen. However, it is very important that we look at the very basic fundamental why property prices could even rise in the first place. It’s all about affordability. No, not about affordable homes. It’s about the ability to pay as determine by the monthly salary.

Remember the years (2009 – 2012, mostly) when property prices seem to be moving up every time there’s a new property launch? A RM230,000 condo in Penang nearly doubled in price when it was completed. My colleague who owned a unit sold her unit for RM400,000. She was extremely happy because the gross profit was RM170,000. Her investment was merely a 10 percent downpayment or RM23,000. Gross ROI is thus RM170,000 divided by RM23,000 and then divided 4 years (the day she booked till the day she got her keys). That’s 85 percent returns per year. Yes, quite unbelievable, right? By the way, the same property is now RM600,000 or higher, today. The question is, how could the price have risen so much? The answer? Someone must have been able to afford it, somehow. So, how much is the monthly mortgage payment when it was RM230,000? Please refer to the image from iProperty.com’s mortgage calculator. The repayment is only RM1,036 per month. The salary of that colleague? RM4,000. This is merely 26 percent of her pay. Yes, we have yet to include her husband’s pay.

What happened when the property price became RM400,000 then? The monthly mortgage is now RM1,802. Do refer to the iProperty.com mortgage calculator to see that all our other assumptions remain the same. At RM1,802, this is 45 percent of the colleague’s monthly pay. Assuming she does not own a very fancy car, the bank would still approve her home loan. Remember the construction took 4 years? Within these 4 years, she has enjoyed 4 years of salary increments. If we look at an average of 5 percent per year from her RM4,000 pay, by the end of 4 years, her monthly pay would have risen to RM4,862. Based on a mortgage of RM1,802 that’s only 37 percent of her monthly pay. This was the reason the new buyer was able to pay for the condo despite it rising so much; a staggering RM170,000 over a period of 4 years! What if she got promoted in one of those years? The increments would have been higher. If she had joined another company for a substantial pay increase, then the percentage (loan vs income) would have been even lower.

Calculate it!

Can the same property increase another RM170,000 then? It did, actually. That same property is now RM600,000. Probably it was also because of demand vs supply but the fundamental will always be about affordability. When the property was priced at RM230,000 it was considered low. When it became RM400,000 it has become affordable. At RM600,000 today, it’s already unaffordable to the same person even if she continued to enjoy increments. What happens if the price now stays almost the same but the same person continues to enjoy a stable pay increase every year? The same person may be able to get her loan approved sooner or later, unless of course the property price rose faster than her pay. Stop anticipating when will the prices rise higher. Start looking at the median income numbers instead for a better idea. Enjoy your property investment adventure!

written on 17 July 2018

Next suggested article: Property prices do not change just because asking prices are falling

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