# Property prices rising higher than income, true. Why can we still buy?

Everyone tells me that their income is rising slower than property prices. I have to agree and I have to inform you that this happens in all countries and in some countries, the condition has become worse. Malaysia? Well, perhaps we are at ‘bad’ level now. Anyway, let’s start with a very simple illustration on affordability. Image shows the mortgage calculator from propertyguru.com.my A typical one. Assumption is made to show what happens when we earn a gross income of RM60,000 a year or around RM5,000 per month. Assuming we can have just RM2,000 for our mortgage per month. We can technically buy a RM440,000 home. As long as we have RM40,000 in downpayment while the bank lends us the remaining. It is stretched over a period of 30 years. If we are younger, we can stretch this longer, usually 35 years max. Yea, based on this calculation, this person, on his own can only aim at affordable apartments. Since he is alone, I guess a 800 sq ft home is already considered big for him. He can even rent out the other 2 rooms and he could stay in the smallest room. If he does this, then he will be able to save more, faster.
So, how much can his salary rise every year? Well, usually it’s 5 percent (that’s what most of my friends got. I am around there too.). So, it will be RM5,000 x 1.05 = RM5,250. An extra RM250 per month. Yea, I know, it’s not a lot. Nowhere near enough for iPHONE X.
What about the property price? RM440,000 x 2 percent increase? (conservative lah). That’s RM8,800. Oh no!!
Salary up by RM3,000 per year. The home price increased by RM8,800.
There’s no way I could afford a home, right? Okay… actually, when we borrow from the banks, the repayment period may be 30 years. In other words, if you were to borrow RM8,800 extra and stretch this over a period of 30 years,including interests, it will still be lower than RM40 per month. (4.25% interest). Note though that this is only for Year 1. By year 2, what if property price increases by another 2 percent? That’s about RM9,000. Stretched over 30 years, this is only an extra RM40+ per month. So, the property price has just gone up by RM18,000 but even with the same increment like your first year, you could still afford to buy. Now you see why even when property prices seem to be increasing in a larger amount than our salary increment, we could still afford to pay for it, up to a certain level lah.
On a longer term, it will get much harder to save enough downpayment. An increase of RM8,800 meant even with the same pay, we must squeeze an extra RM880 as savings for our first property. Since we have an increment of RM3,000 per year (5% increment), we need to save around 25% of our extra income just to match the increase in property price. In other words, if we chose NOT to buy a property as soon as we have enough downpayment, the affordability is going to get tougher. This is what they meant by money getting smaller. Depreciation of ringgit is another matter. We earn RM and pay RM for property. Anyway, this is also the reason why property prices could increase even when salaries are not increasing as fast. As long as people could still afford, they will buy and usually this pushes the price up slowly. Will it increase to such a level that no one could afford? If it hits that level, then property bubble will burst and everyone who has money will be able to buy cheaper properties, for a while.
The above is an extremely simple calculation but I think you get the idea. This is why for some countries, the property prices are already at very dangerous levels. Many governments are applying the cooling measures. What they are doing is to ensure property prices move up slowly, if possible, slower than salary growth. Or, they push for more affordable homes because by doing this, people do not need to keep trying to buy more expensive homes and pushing the prices up since their typical increment meant that they could still afford to buy even when property prices increase. Happy understanding. If you have benefited, do sign up for 1 article a day from kopiandproperty.com
written on 14 Nov 2017
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##### Charles Tan

Charles is Founder of kopiandproperty.com He writes from his investment experience for the the past 20 years in investments including property, stock, unit trust and more as well as readings and conversations with many property gurus in the industry. kopiandproperty.com is an independent property blog which is not affiliated to any media company, property developer or even real estate agencies.