City & Country: What to expect next year: House prices will not drop, say experts

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WHILE Malaysia’s property market has gone through many ups and downs over the past few decades, house prices have continued their upward march. There are fears that the situation is getting out of control.

To prevent that from happening, the government abolished the developer interest bearing scheme, instituted new Real Property Gains Tax rates and introduced a loan-to-ratio value of 70% for a third property, among others. These effectively squeezed speculators out of the market. However, house prices have not fallen to affordable levels and it does not look like they will in the future.

“The property market will continue to see rising prices, mainly because of the market mechanism of supply and demand. However, the growth is anticipated to be at a slower pace compared with previous years,” says Rahim & Co International Property Consultants group executive chairman Tan Sri Abdul Rahim Abdul Rahman.

He adds that according to the Valuation and Property Services Department of the Ministry of Finance, the country still needs 1.96 million houses. While the government has committed itself to build one million affordable homes by 2016, he believes it could also change policies to help the situation.

“The government should relook at policies related to private sector housing developments. Housing developments should not just focus on the provision of low-cost housing but also medium-cost and affordable houses,” Abdul Rahim suggests.

Knight Frank Malaysia executive chairman Eric Ooi concurs. “Property prices in the secondary market are not expected to come down to affordable levels. However, with the focus now on affordable housing, we expect to see more launches in this category. In the short to medium term, the leasing or rental market may see more enquiries and activities due to tighter financing and higher loan rejections for house purchases,” he says.

C H Williams Talhar & Wong (WTW) managing director Foo Gee Jen has the same views. “Prices are unlikely to come down, especially for houses in the medium-price range where demand is the highest. More needs to be done to provide affordable housing, otherwise young families can only afford to rent homes,” he says.

All property experts City & Country spoke to agree that next year will be a challenging one for the property market. Knight Frank’s Ooi says, “Moving forward, the market is expected to remain lacklustre and challenging amid the uncertainties surrounding the implementation of the Goods and Services Tax (GST) in April 2015. The recent plunge in crude oil prices and lower trade surplus could aggravate the country’s economy and its property market, especially if they continue to fall for a long period.

“Although there may be price corrections in selected locations and property subsectors or products, property prices in general are expected to hold if the economy continues to grow moderately at between 4% and 5%.”

Abdul Rahim agrees with Ooi on the GST’s effect on the market. “Property buyers will want to know how the GST will impact the property sector. They will most likely wait and see before making any decision to buy.”

While house prices are not expected to go down, it is believed that they will mainly be determined by market forces, although location will still play an important role.

“We foresee that the market will be very mixed in 2015 where some

areas will see prices plateau while others will see them drop. Generally, prime and established locations will hardly see any price drop,” says Reapfield Group of Companies founder and president David Ong. “Another factor affecting prices will be the demand-supply situation. Some locations have seen many new launches, creating a mismatch or imbalance in the type of properties in the market. Other factors include the infrastructure and amenities available.”

SK Brothers Realty general manager Chan Ai Cheng says, “I don’t see much price movements in 2015. However, if there is no boost for the property sector by end-2015, then 2016 will be a year to watch. Property prices are a factor of supply and demand and with rising costs, it is difficult for them to come down. However, the phrase ‘It is all about location, location, location’ holds true.”

History lesson

Those born in the 1980s and 1990s, or typically known as Generation Y, may not recall the difficulties that many families and companies went through in those periods. The 1986 recession and 1997/98 Asian financial crisis will be forever etched on the minds of the older generation, who not only had to survive those harrowing times but also, for those with businesses, find a way to keep afloat.

“From 1986 to 1989, Malaysia experienced its most severe and prolonged economic recession. Almost all of the leading Malaysian entrepreneurs faced insolvency,” says WTW’s Foo. “Almost all commercial banks faced massive loan defaults, were vulnerable to over-exposure to many single customers and stood on the brink of collapse. Many property development projects and large housing schemes were abandoned. The recession also saw the demise of deposit-taking cooperatives and many workers were retrenched.”

He adds that the huge financial reserves accumulated by Bank Negara Malaysia, the restructuring of the banking system and implementation of prudent banking practices, such as capital adequacy ratios and single customer limits, helped in the recovery.

“Larger banks were strengthened and smaller financial institutions were encouraged to merge,” Foo says. “This led to one of the longest periods of economic expansion and prosperity, from 1989 to 1998, until the Asian financial crisis.”

During the crisis, there was an outflow of foreign capital and the stock market crashed. To counter these negative effects, three organisations were set up to deal with the problem: Danaharta, Danamodal and the Corporate Debt Restructuring Committee (CDRC).

Danaharta, an asset management company, was set up to remove non-performing loans from the banking sector. Danamodal was formed to recapitalise “sick” banks while CDRC was set up to enable borrowers and creditors to find amicable solutions to debt problems without resorting to legal means. The latter was also meant to enable companies to obtain credit lines during the crisis.

According to Foo, there were three primary reasons why the property market survived the crisis.

“Firstly, Malaysian households had a high savings rate through the Employees Provident Fund. As a developing country, property values were on a long-term upward trend as productivity increased and infrastructure development gained momentum. And demand for residential properties was insatiable in the light of the high population growth rate and low rate of homeownership, which was being reversed,” he says.

The subsequent slowdowns — 2001 dotcom bust, 2003 Gulf War and SARS epidemic, and 2009 global financial crisis — had an impact on the local economy but they did not affect the property market much.

Foo notes that during the global financial crisis, there was no material decline in property prices, although transaction volumes and values declined.

It is hoped that these past experiences will ensure future generations do not take the current prosperity of the country for granted.

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This article first appeared in City & Country, The Edge Malaysia Weekly, on 22 - 28 December 2014.