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Property price based on inflation. 1 reason to show why this is okay.

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How should property price be moving? How about property price based on inflation? As all of us know, inflation affects everything anyway. If there’s no inflation at all and we are still doing the same job, there’s no need for any increment. The increment serves a purpose. It is to ensure out life next year is not worse off compared to the year before. If we are taking up a higher responsibility, then the increment is for our contribution. It has got little to do with inflation.

Oxford Reference says this is the definition of inflation: A general increase in prices in an economy and consequent fall in the purchasing value of money.

Briefly, it says that when prices increase, with the same amount of money, we would be able to buy less of the same item. In order to ensure we could buy the SAME quantity of the item, the amount of money has to go up. This is why we receive increments despite doing the exact same thing year after year. Just need to be very careful because one day, when they could hire someone to do the same work for less pay, they will hire that someone and we would lose our job. So, what are the advantages of having the property price increase following the inflation rate?

# Inflation rate is lower than the property price increase. Take a look at the two images below. One shows inflation rate, another shows property price movements.

property price based on inflation
Image Source: https://www.statista.com/statistics/319033/inflation-rate-in-malaysia/

Highest point for inflation is 5.43%. Never mind what you think about inflation numbers being inaccurate or that for some people, the inflation number is actually higher. They used that same basket of goods over the years, so it’s a good benchmark for movement over the years. Well, for the last few years, the number has been close to zero… Average number over the years is around 3%. I think for many, the typical increment is 5%. So, at least that’s why so many people could still afford to buy a RM15 latte these days… (pun intended)

Meanwhile, for property price over the years, please refer to the image below:

Image source: housingwatch.my

We can see clearly that on an average basis, the property price has been increasing by 6.3% for the periods of 1990 – 2013. In 1998, it was close to negative 10% but generally, 6.3%. If we look only at the years from 2014 to 2019, the average has dropped to 6% per year. Looks like the trend is down which is good for the many people who are still saving up to buy their very first property. By the way, there’s no need to time the market if we are buying for own-stay. Buy and stay. 10 years later, if the average increase had been 5% per year, it’s more than twice the FD rate…

Property price based on inflation?

A RM500,000 property would increase by RM30,000 if we follow the average of 6% per year. In other words, every month your property is increasing in price by RM2,500. I do think this is quite high if this should be happening every year for the next 10 years? For the benefit of more Malaysians yet to own a home, let’s not wish the property price to keep increasing 6%, let’s make it lower.

Meanwhile if the same RM500,000 property price were to follow inflation instead, then perhaps it would be around 3%. That’s RM500,000 x 3% = RM15,000 per year. On a monthly basis, the property price is increasing by RM1,250. By the end of 30 years, the appreciation would have been a simple RM450,000.

Before everyone now thinks that the number is quite good, do note that with the mortgage payment, we are also paying interest… and if we were to buy a RM500,000 home with a downpayment of 10% and a 3% interest rate by the end of 30 years, we would have paid an extra RM233,000 for the home. Do look below:

So, home ownership if stretched over a long period of time, should be a good investment. At the very least, it takes away the effects of inflation. This is why home ownership has also been known as a natural hedge against inflation. Anyway, all these are just WHAT IF situation yeah. No one is able to control the rate of property price increase. Can only wish for this, “Property price based on inflation.” Happy understanding. For own-stay, do proceed.

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2 thoughts on “Property price based on inflation. 1 reason to show why this is okay.”

  1. The calculation is misleading, did not consider the interest that need to be paid.
    If property price raised by 1%, but the interest is say 4.3%, so is -3.3%.

    Should not kept on mislead people

    Reply
    • Thanks for the inputs Foong. I think when we buy a property,it’s for two reasons. Own stay or rental income. If own stay, we must also include the rental if we did not buy into the calculation. This rental amount is likely to be substantial even if we can say that it’s renters market currently. If it’s for rental income, the rental is likely to cover the interest portion even if the rental may not cover the full mortgage amount currently. This is why property investment, as long as prices are increasing over time following inflation, it is fine. As for historical numbers, 1990 – 2016 showed property prices rising by an average of 6.5% per year. If we now assume that for the next 20 years, it is halved, it will be 3.25% per year, still a healthy number. Hope this explains. As for buying overpriced property or wrong property or the developer did not complete the projects, that’s a totally different story. Happy holidays Foong!

      Reply

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