In my talks, I love to ask this question. ‘Are property prices increasing because developers are launching their projects at ever higher prices?’ There are always a few people who nodded their heads. Then, I asked, ‘Are property prices increasing because of speculation in the market?’ Usually, more would nod their heads. Fortunately when I asked if the cause of property price increase is the government, usually no one nodded. Perhaps they agree that the government is on their side. Actually, they are (government), with the assistance from Bank Negara Malaysia. They are doing their best NOT to let property prices increase faster than income. However they are NOT looking to push prices down because this will affect owners who have bought earlier. There’s now a view that ‘the real issue’ prices are increasing is because of ‘price discovery’
Here’s that article in edgeprop.my Khazanah Research: Comparable property valuation leads to inflated prices Briefly, Khazanah Research Institute (KRI) chairman Dr Nungsari Ahmad Radhi said “the real issue” is price discovery, as prices of new supply by a developer depends much on the valuation of the sub-sale units in the surrounding area.” He added, “The [valuation] decision on one acre influences the next one regardless of [development] cost. It becomes an auction.” In KRI’s report titled “Rethinking Housing: Between State, Market and Society”, the house prices in the country have escalated at a compounded annual growth rate (CAGR) of 9.1% since 2009, faster than the 3.1% CAGR for income growth during the same period.
KRI research director Dr Suraya Ismail said, “Yes, house prices are inflated.” She explained, “Too many people are dependent on [house] prices going up.The percentage fee received by [a property agent] to sell an existing unit is based on sale price. So nobody in this profession would want to make house prices go down.” In the report, there was a suggestion to explore the cost approach — basically cost of land plus cost of construction, less depreciation — for valuation of new units, although that will mean there will be downward pressure on prices for new units in the short-term. Here’s that article in edgeprop.my
Having invested in properties as well as speaking to many first-time home buyers and property gurus in the industry, my conclusion on property price are just two. It’s demand vs supply and prices rise due to salary. Today, when we look at the property market in Greater KL for example and we will see that prices in popular areas continue to stay strong and every new launch will either carry the same price per sq ft or higher. This is despite transactions trending downwards. The reason why popular area prices are doing good? Supply is very limited in these mature neighbourhoods while people who wants to buy into these areas are many times higher. Thus, they are willing to pay slightly higher.
If we break this down further into monthly mortgages, we will notice that a RM20,000 increase in price is only RM100 extra mortgage payments per month. This meant that if prices increase by just RM20,000 per year, the extra mortgage is RM100 per month. It will be EXTRA RM500 per month after 5 years.
Usually the increment for 5 years even for a junior executive will be higher than RM500. E.g? RM2,500 * 5% per year * 5 years = RM690 up per month. In other words, even if this junior executive chooses to buy the SAME property at RM100,000 extra (5 years of RM20,000 increase per year), his salary increments are ENOUGH to pay for it.
The issue here is that the junior executive DOES NOT want to buy in cheaper and further areas but only wants to buy back into areas where the whole world wants to buy in. After a couple of transactions, the prices trend upwards. Please remember that prices do not go up only after all the 20,000 units in the whole area goes up. Prices increase when a few transactions continue to show the same trend. The real reason property prices go up? Demand vs Supply as well as the fact that the person could afford the monthly mortgage.
We can have whatever method to calculate but if we do not solve the fundamental issue, the prices will continue to go up. Educate the buyers. There are so many new areas which is now connected by MRTs and LRTs. In Australia, they are called SUBURBS. They are popular too. That extra few kms, that extra few stations away meant that they could buy cheaper properties. However, if the whole world, including expert researchers do not know that indeed there are still landed properties at RM400k plus, then the first-timers will always ask, ‘why are prices so high in the areas I want to buy?’ Happy understanding.
<Featured Image is courtesy of Stock Photos from Andrii Yalanskyi>
Article written and edited by Charles. News article summarised by Dina Batrisyia.
Next suggested article: 4 reasons we should not over-stretch ourselves