This article first appeared in The Edge Financial Daily on July 25, 2018

KUALA LUMPUR: A think tank said the government needs to be ready for the property bubble — generated during the property market peak between 2012 and 2013 — to burst and for the risk that this could lead to an economic crisis.

The Institute for Democracy and Economic Affairs (IDEAS) said the property bubble in 2012 and 2013 was brought about by spectacular growth in property transactions, particularly in the high-end segment.

This, said IDEAS senior fellow Dr Carmelo Ferlito, was ignited by rising profit expectations, growing demand and at a later stage by a supportive credit market.

“The focus on the high-end segment was justified by high demand, and it is therefore natural that investment expanded in that sector. However, now that it appears clear that unexploited profit opportunities are disappearing, capital allocation restructuring appears necessary,” he said.

Ferlito said this in a policy paper entitled “Affordable Housing and Cyclical Fluctuations: The Malaysian Property Market” released yesterday, which also contains ways for the government to prepare for the property bubble burst.

“The government could respond with market-oriented solutions and pay special attention to household financial exposure,” said Ferlito.

Secondly, he said, the government needs to downplay its role in the property market by reducing the number of government agencies and encourage the private sector to get involved in the affordable housing market.

“The high involvement of government agencies in the affordable housing market risks crowding out private initiatives and preventing the necessary restructuring from taking place,” he said.

Ferlito also stressed the need for the government to enhance financial literacy among Malaysians, with an orientation towards the value of saving and the possibilities offered by the rental market.

“The government could also look at easing the regulations in the property market for foreigners in possession of a regular working visa and paying taxes. This could help the industry in a crucial moment of difficulty,” he said.

Contacted by The Edge Financial Daily, Ferlito defined a crisis as a normal process of readjustment that occurs after a bubble.

“We are now in the moment where we can choose. We can make the bubble worse with credit support like what the government has recently promised, and delay the burst and the readjustment, thus putting the rakyat in a more difficult situation by making them more financially exposed,” he said, pointing out that the household debt to gross domestic product ratio in Malaysia is already very high at 85%.

“Or we could let the crisis follow its path, and this will sooner or later bring [property] prices down.”

The housing and local government ministry said earlier this month it is working with Bank Negara Malaysia to ease housing loan requirements for homebuyers in a bid to reduce the number of unsold completed residential units in the country.

Property experts weigh in

Savills Malaysia executive chairman Datuk Christopher Boyd disagreed with Ferlito’s views, saying there is no property bubble in Malaysia to begin with.

“I would say the situation back in 2013 was that the market was getting overheated, and not a bubble. ‘Bubble’ is probably too strong a word. Anyway, in 2013, many young Malaysians were getting into debt, which was alarming, and that was when property cooling measures were introduced.

“[At present,] there is undoubtedly a higher amount of unsold stock, mostly high-rise properties, but it is not of bubble proportions,” he told The Edge Financial Daily.

CBRE | WTW managing director Foo Gee Jen is of the view that the bubble should not apply to the property market as a whole, as the overheating or oversupply is only evidenced in high-end products and small office home office units.

“We should not generalise and say the whole property market is in a bubble,” he said.

Foo opined that the property market now is much healthier compared with 2010, when property prices rose by double digits and when financing rules were less tough.

“The property market is less speculative now, with moderate price movement and banks are more prudent with loan approvals,” he said.

RHB Research analyst Loong Kok Wen opined that there should be special incentives given to encourage the private sector to get more involved in the affordable housing market, as suggested by IDEAS.

“For example, lower development charges and higher density for a plot of land, which will allow the developer to undertake affordable housing,” she told The Edge Financial Daily.