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One day, all properties will become unaffordable. What happens next?

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One day, all properties will become unaffordable. What happens next?

Anyone has this thought on their mind? What happens when property prices become higher than ‘severely unaffordable?’ Instead of spending 35% of one’s salary for the home mortgage payment, one has to spend 70% or higher on the monthly mortgage? Instead of having a choice whether to buy nearer and smaller versus bigger and further, now every property ranges from crazy expensive to impossible expensive? What will happen?

How about a look at the home prices over 10 years?

MHPI

Typical calculation for how much to pay per month for a RM500,000 home?

Source: calculator.com.my

Salary vs Mortgage? Why 35%?

Referring to the image above, the typical mortgage per month for a RM500,000 home with 10% down-payment is RM1,900. If this is calculated as 35% of the income, then the person who could afford this RM500,000 home based on pay should be earning a minimum of RM5,430 net salary per month.

Why do we say 35% then as a recommendation? Well, we do need another 30% for a car (since many Malaysians working in Klang Valley is still saying that it’s impossible to use public transport and they want a car instead…) and the remaining 30% will be for all other expenses lah. We still need to eat and pay for broadband etc right. Thus, a person earning RM5,430 who allocates 30% of the income for a car could afford a car repayment of up to RM1,600 per month. (Better buy cheaper cars and save the money yeah.)

Three scenarios in case everyone stops buying new property as it is just too expensive.

#1 – Property developers will all go into some other industry. No point in building anything if nothing gets sold… right? Build and sell higher is impossible since prices already super high. If they build and sell low prices, they may be looking at huge losses since land prices would definitely be up and more. Start imagining… those big developer brands… all announcing they are going to exit the property market and will do something else altogether. Possible?

#2 – Everyone will just stay at the current place since no new properties will be built. Property development is no more but population is still growing. So, maybe more and more people will be staying within the same unit? This will help to keep the rental cost down for everyone since now more people will share the rental for the whole unit versus 2 or 3 previously. Can imagine this happening?

#3 – Banks will become smaller. Usually lending to home purchases would be a big chunk of all their loans. Now they will have to find some other loans to focus on. Perhaps they will then have a bigger chunk of all their lendings from the personal loan then? Whoa… scary yeah. if you are the bank, you lend to home owners, there’s still the home to auction if things go bad. If personal loan… I do wonder what will happen.

More likely to happen?

Instead of the above, more likely to happen when property prices went up to unsustainable levels is that the property market will collapse lah. Please always remember that property market will always be supported by the fundamental; income of the people / households.

If the prices rose too high and too fast, property bubble will start building and very soon when it’s no longer sustainable, the property prices will just collapse and the whole market will again try to find a new benchmark. Seriously, do we want this to happen? When property market collapses, it’s a financial crisis yeah.

This is why property prices will never become unaffordable. Unless… Bank Negara Malaysia (BNM) did not take pre-emptive steps to prevent property bubble. The government also totally ignored all the signs of a property bubble and did not rein in property prices.

All the property experts refuse to write / speak about the potential bubble and prefers to keep taking money and kept saying good things about the property market and misled many property buyers… At the moment, I did not see that happening. Some more, there are today still over 30,000 of overhang units…

Plus secondary market is still extremely vibrant… So, at the moment, there are no signs that property prices will suddenly become totally unaffordable to everyone. Happy understanding.

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Charles Tan The Founder The Writer Kopiandproperty
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.

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