Rental as a determinant of the property market. Sounds clearer.

I read a good article about the property market, property prices and rental by Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University. Here’s her thought in an article in  In the article, she shared that whenever property prices are rising, it is usually assumed that it’s because of a shortage of supply versus the demand. Thus, the easy solution to this is just to build as many units as possible to push the supply side to go up and thus the prices to stop going up. (Sounds very familiar, right? More affordable homes so that everyone can own a home and property prices will stop going up. By the way, theoretically, it does not work that well, even when the government is controlling majority of all supply of new homes. For example, Housing Development Board of Singapore. Home prices are still rising…)

Okay, what if we look at this demand and supply differently? Rachel shared that the ‘price’ indicator of demand versus supply should be based on the RENT and NOT the property price itself. In other words, to know if there’s too much demand or whether there’s a shortage in supply, we look at the monthly rent numbers instead. The reason is simple. Rent reflects the ‘cost of consuming housing’ or also known as the cost to living in a home. This meant that IF it is true that supply is really lagging behind the demand, then we should expect rents to rise. In brief, what she is explaining is that when there are fewer home choices and people need to rent, they will be willing to pay higher rentals. House owners who are staying in their own home and wants to sell their homes at higher prices should not be counted into the equation of property prices rising due to high demand. Here’s that full article again and there are also some interesting charts in the article too. 

She has a point. If I am an owner of two homes and I could sell my house at a higher price, it does not mean that the supply in the property market is insufficient. It only meant that people are agreeable to pay higher prices for it. Rental is different. Just look at some of the condos rental today. Many have actually fallen and when we buy these condos today, the rental yield is likely to be close to zero if not negative. This reflects better on the demand for homes and certainly if the rental yield is falling, it tells us two things. The property price may have risen way too high or that there are still many choices when it comes to renting one. For both these reasons, the solution is definitely not to build even more condos because we are going to ‘kill’ the whole market. Perhaps we can have some study on the rental for the Malaysian market in order to have a better idea? This should be very interesting.  Happy understanding.

written on 9 Aug 2018

Next suggested article: Property prices rising higher than salary increase. Why we could afford higher property prices?

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