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M'sian homes more expensive than some developed countries
Published on: Monday, November 24, 2014

Alor Setar: OF late, there have been renewed concerns about house prices and affordability. The perennial question is: Will house prices ever come down? The concerns about affordability is underscored in the recently released report, The State of Households, by the Khazanah Research Institute.

The institute reported that houses on average cost 5.5 times annual median income, when it should be just three times annual median income.

The report further says that "in median income terms, our houses are more expensive than those in Ireland, and even Singapore."

(Note: The median income refers to the income that is in the middle if you figuratively write down all the income in order from least to the greatest. In essence, no more than half the population has a greater or lesser income than the median income. The average is simply adding all these incomes together and dividing by the number of incomes.)

It also says that Malaysian property developers' profit margins - at 21 per cent - are higher than those in the UK, the United States and Thailand.

This issue of affordability is being revisited with the impending goods and services tax (GST) to be introduced on April 1.

House buyers are of the view that even before they could pick themselves up from the wave of spiralling prices, a second wave is about to hit them, which will push up prices further.

Nevertheless, there is something positive in today's housing market. There is a general consensus among property consultants that the market has stabilised. To a great degree, speculation has been weeded out.

In a project located in Kota Damansara, Selangor when the first block was launched in 2012, all the 400-odd units were sold in less than a week. When the second block was launched, the next 400-odd units took a longer time to sell. The developer has launched the third and final block at about RM1,200 per sq ft but there were only 80 buyers after its launch early this month.

Says PA International Property Consultants (KL) Sdn Bhd Managing Director Jerome Hong: "A lot of the speculators have been removed with the various cooling measures and stringent banking requirements. Prior to this, developers took care of their own marketing and do not need the services of marketing agents."

Hong says investors clubs are also no longer recruiting as aggressively as before.

The second positive in today's market is that buyers are "more genuine" with the majority of them purchasing for own occupation or to upgrade.

The next two largest groups are people who are buying for their children and those who are buying to rent out the units.

Investors buy to rent out, while speculators buy to flip.

"While we continue to see speculators, they are considerably few," says Jordan Lee & Jaafar Managing Director P. Tangga Peragasam.

On the current concerns with regards the GST, Tangga says there are other issues looming ahead. He draws attention to a promotion by a local commercial bank which is offering fixed deposit (FD) rates at 4.15 per cent per year for tenure of six to nine-month.

He is of the view that at 4 per cent, there will be more interest in FDs rather than big ticket items like buying a house.

"With a house, one has to pay outgoings like service charges, quit rent, assessment and repairs. This may deter some. Prior to this, people buy a landed property for capital appreciation and a condominium for its yield. However, we are seeing both (yield and capital appreciation) being compressed today," he says.

The rental of a double-storey in Bangsar and Damansara Heights, priced between RM1.8 and RM2mil, is about RM3,300 per month, with a gross yield of about 2 per cent. Some are seeing a gross yield of only 1 per cent. They may be better off parking their money in a bank, at 4 per cent, he says.

The 25 per cent to 30 per cent upside that speculators used to enjoy upon flipping their property no longer exists today because the last several years, developers have been selling their properties at future prices.

Therefore, the two motivating factors in property investments – yield or capital appreciation–- are no longer as attractive as before the run-up in property prices.

The rise in interest rates also mean larger mortgage payments and in today's weak salary market, coupled with stringent lending conditions, many have been deterred, or have their applications rejected, says Tangga.

"Our salaries have not grown in tandem with property prices," he says.

Tangga also brought up the spectre of the slide in oil prices. "China is slowing, Europe has not recovered and the growth in the United States is fragile. With the slide in oil prices, will these global factors - together with the local affordability issue – translate into a drop in property prices?" Tangga asked.

Das Gupta the principal of Stocker Roberts & Gupta Sdn Bhd says the lettings market is very weak and this weakness is evident in all sub-segments of the property market. Many of the sectors are "flat" and many buildings – both office buildings and condominiums – are empty. Owners will be forced to reduced rental, he says, referring to the overall property market.

He says the paltry capital appreciation was evident since a year ago and he expects the situation to persist one more year, at the minimum.

Says Gupta: "Never in the last 20 years have I seen so many bungalows in Damansara Heights – one of Kuala Lumpur's premium residential suburb – up for sale, with owners asking realistic prices."

The weak market is already seeing developers opting for new strategies to counter the affordability issue. PA International Property Consultants (KL) Sdn Bhd, Jerome Hong, says developers will do generally do two things – give more freebies or build smaller units.

Says Hong: "Instead of 20ft x 80ft, they may trim it down to 18ft x 70ft, and build three storeys. In the case of high-rise residential projects, they offer smaller built-up areas."

During the last several years, the high cost of land price has resulted in developers building shoebox-sized units of between 400 sq ft and 500 sq ft. Most of these - generally known as small offices, home offices (SoHos) - were launched in 2011/2012 and would be completed next year.

Hong says a large number of high-rise projects today and the next year will have the bulk of their units – up to 70 per cent – as small units of about 700 sq ft and below with three bedrooms, what he calls the "modern low-cost sized units."

With Christmas and the Chinese New Year coming soon, developers will also be throwing in new gimmicks although they may not say these are outright price reduction.

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