No buyer wants to pay at bank valuation pricing?

No buyer wants to pay at bank valuation pricing?

A friend said recently that the property market is bad. Her reason is because no buyer wanted to buy her property at the bank valuation price. There are a few important things to note here. How do we know if property market is bad? First thing is to look at the number of transactions. If the property transaction numbers are dropping every quarter and all new property launches are empty of visitors, probably that’s a sign that the property market is not well. What’s the number of property transactions? Take a look at below:

The residential property transactions do not show a drop every quarter. It’s up and down. In other words, property market is moving and this is definitely not considered ‘BAD.’ The next indicator is even more important than just transactions alone. What’s happening to the price for the residential property transactions?

What happens when every transaction is happening at a lower price?

When times are not well, sellers have to sell at a lower price because buyers are king. This is why when times are bad, property price drop with every transaction. If the unit on your left was sold for RM500,000 last month, maybe due to some pressure, the unit on your right is sold for RM480,000. When units within the same floor are being sold at an ever dropping price, then of course when you sell your unit, chances are the price would be lower. Just need to remember that the opposite applies too.

Look at the image again, carefully

Total number of transactions (Volume) are dropping! 5.2 percent lower versus the previous quarter. However… the Value dropped just 0.6 percent. If you understand statistics, this tells us that the average price that the transaction is happening is actually going up yeah.

If volume is down 5 percent but the Value dropped 10 percent, then it is very clear that prices are dropping on average. Definitely showing a market which is not so healthy. Maybe as my friend said, the property market’s bad…

What’s bank valuation then?

Bank’s valuation is based on the transactions and it is not a fixed number. When many transactions are happening at a higher price, the bank valuation may move upwards. It will not follow the highest transacted price but it could be nearer to the median price instead. However, if transactions continue to show a dropping price, then of course bank valuation will also drop. No banks would want to lend at a high valuation as it’s a high risk. If things go wrong, the bank will not be able to recover their loss even by auctioning the property.

In this case, the bank valuation could have followed earlier transactions or even the valuation was based on the time when the developers were selling it. However, transactions after the keys are handed over would have to depend on market forces and this could be either up or down and bank valuation does not mean buyer will be willing to accept that price. It just meant that should the buyer accept the price, chances are banks could lend at that valuation.

Hope this explains and always remember that if we did not do enough due diligence and we paid too high for a certain property, bank valuation will not save us from the mistake. Before buying, always benchmark against similar properties. Always understand why we are buying. If possible, using rental as a gauge is a better measurement too. When prices are too high and rental remain low, it could be more of a speculative pricing. Only when rental catches up to the typical mortgage that we are certain the valuation is now supported by the market.

Happy investing.

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