Here are the 4 property bubble signs we should be aware of.
Property Bubble usually starts to happen when the interest with the property market is way too much for its own good. Speculative purchase happens and if the property bubble really did burst, then the last batch of buyers would now be faced with the prospect of huge losses OR they will have to hold on to the purchase until the property market recovers its lost ground. Usually, this takes years to happen. In order for us to prepare to identify some of the signs, here are the 4 typical signs for building up of a property bubble in Malaysia.
#1 – Non-Performing Loans (NPLs) are increasing
When more and more people start to fail to pay their loans in time, these loans would soon become a non-performing loan (NPL) to the financial institutions. NPL are defined as loans for which the repayment has not happened for 90 days. It’s not possible to ask our friends if they have been failing to pay their mortgages. No one would tell you their sob stories. However, it’s really possible to look at what banks are reporting every quarter. So, how’s the NPL for the Malaysian banks?
This is the latest numbers as compiled by CEICDATA. (Click here to view the full report with comments. Briefly, NPL at around 1.6 percent is considered low by international standard.
#2 – Everyone could buy a property!
Let’s not forget that buying a property is not like buying vegetable or fish from the market. Be very afraid if the news indicated that everyone who applies for a home loan gets approval for a home loan. Banks kept lending and the approval rates are super high. (Remember… this was what was happening before the 2008 mortgage crisis happened in that country. Yes, it’s called mortgage crisis for a reason…)
As of today, the news most people are accustomed to would be how hard it is to get a loan. Latest stats even showed that approval of loans are down to just 35%! Take a look at below data from NAPIC. (To read more explanation, click here for my earlier article)
Now, banks are being so conservative (and calculative and does not trust the developer’s selling price). How one is not able to get 90% loan but only 80%. Calculations on buyers’ income is based on net income and not gross. Basically, Bank Negara Malaysia is still very much in control to prevent any property bubble in Malaysia due to speculative activities.
#3 – There are really nothing affordable out there!
Many say we could look into certain period of years where the property prices rose faster than the income increments. By the way, before the years when property prices rose faster than the income increments, there were many years where property was really just a home instead of an investment. At the time, salary increments would be a better bet than to wish for property price increase.
Below shows the chart for property price increase over the years. Above 0 means it’s positive price increase and below 0 means the price actually decreased.
However, at any point in time, the following applies. When there are NO properties which people could afford to buy, then the property market needs a correction. Today, if we MUST buy a landed property, there are still sub RM400,000 ones (much further away from city centre). If we MUST buy a property within the city centre, there is the secondary market to choose from. The homes would not be contemporary but you still have choices.
If one really just need a roof over one’s head, a check with property sites would reveal that secondary choices below RM250,000 are aplenty even within Klang Valley. Just do not expect something spectacular. In some countries where the property market is REALLY just for the rich, we will see that affordability is no longer possible. Malaysia property market is not at that level currently.
#4 – Unemployment is rising super fast
Someone said unemployment rate in Malaysia is now 30%. (read the article here) The calculation for the typical countries are NOT based on this calculation proposed yeah. Anyway, our unemployment rate (as at latest available data) is around 4.8 percent.
What we need to understand is that if unemployment numbers continue to rise very fast; people are losing their jobs very quickly and unable to find one back soon, then they will start to face financial difficulties. When this happens, they may not be able to continue paying for their loans. This is when many people will start to sell their properties and when many people try to sell their properties at the same time, many will try to push prices ever lower. The result would be disastrous yeah.
So, here are 4 signs which we could watch as it unfolds when it concerns property bubble in Malaysia. Briefly, there are no strong signs of a property bubble in Malaysia now. There is no need to wait for the formal announcement that we are in some property bubble. That would usually be too late. Do note that no one can predict if there are unforeseen circumstances yeah. Just like if a financial crisis suddenly start in some advanced nations, it will affect everyone else too. Let’s hope the central banks in those countries are also vigilant and not just keep printing ever more money… (as what is happening now and somehow everyone still needed to hold on to that currency)
Next suggested article: Malaysia inflation is expected to normalise in 2021. Good news?