PROPERTY BUBBLE IN MALAYSIA:
WHEN WILL IT BURST..?
DR MUZAHET MASRURI
Malaysia is facing property market bubble. As stated in Bank Negara report, for the first quarter of 2017, a total of 130,690 residential units were unsold. Approximately 83% are in the price category of RM250,000 and above.
For commercial real estate, Bank Negara reported that vacancy rates in Klang Valley alone had increased to 23.6% for the first quarter of 2017 compared to 20.9% two years ago. The rate is predicted to reach 32.8% in 2021 - higher than during the Asian Financial crisis in 1997.
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| The price for residential homes in Putrajaya soaring, beyond the capabilities of buyers |
However, TV1 News, on 4 December 2017, reported the current value of the unsold property, including residential and commercial buildings amounted to RM35.5 billion.
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| News TV1, December 4, 2017 reported the value of unsold property amounting to RM35.5 billion |
Why Malaysia faces 'property market bubble'?
This is due to the fact that the property market is projected to be booming after the end of the world financial crisis in 2008. The forecast attracts investors, especially housing developers and speculators who are looking for quick profits
This factor was backed by the lower Base Lending Rate (BLR) by Bank Negara (BLR was changed to Base Rate effective from January 2, 2015). This encouraged them to make loans to invest in the real estate sector.
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| Property supply has exceeded demand but new construction is still ongoing |
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| The auction of residential houses has become a commonplace |
What's wrong with property market bubble?
It's nothing wrong as long as the bubble has not exploded. But when it starts to erode and erupts it can adversely affect the banking system. The banks will be burdened with high non-performing loans (NPLs), in particular among housing developer, speculators looking for short-term profits and home buyers. A high NPL position may disintegrate the financial system and the country will be caught in the economic crisis.
Any country had ever experienced the collapse of the real estate market?
Yes, there are. For example, the collapse of the property market in the United States was the root cause for the global economic slowdown that began in 2008.
In 1990s, the price of residential homes in the United States was stable. By 2002 to 2006 the price of houses had gone up almost 85%. The vibrant market of residential houses began to collapse in 2007. It was due to the high number of non-performing loans (NPLs) among home buyers, categorized as subprime lending, i.e. giving loans to borrowers who had trouble repaying their loans.
As a result, the financial system in the United States collapsed involving not only banks and domestic financial institutions but also foreign banks involved in lending. In 2008, Lehman Brothers, the fourth largest investment bank in the United States and the American Home Mortgage have been declared bankrupt.
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| Lehman Brothers, the 4th largest investment bank in the US was declared bankrupt during the 2008 Financial Crisis |
Any other examples of property market collapsed?
Another good example is Japan. In early 1980s Japan experienced a very rapid economic growth that led to speculative activity in the stock market and real estate sector.
In 1987, the Bank of Japan had lowered the bank's interest rate to 2.5% to strengthen the value of the yen. This move had further increased the speculative activity, as speculators took advantage of low interest rates to increase borrowings and invest in real estate and stock market sectors.
To curb the extensive speculative activity, in December 1989, the Bank of Japan increased inter bank lending rate to 4.25%. The effect was that, for borrowers, the borrowing costs had almost doubled. As a result, banks were burdened with the unpaid debts and the banking system in Japan had almost collapsed.
Analysts referred to this event as the Japan's Lost Decade. The bad luck that hit Japan still continue until today where the country is experiencing a state of deflation (the decline in general prices of goods and services that reached negative inflation) and low economic growth for almost two decades.
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| Analysts called the collapse of the financial system in Japan as Japan's Lost Decade |
Had Malaysia experienced 'property market bubble'?
I remember, during my working experience with the National Economic Action Council (MTEN) in 1998, Malaysia was facing a serious property overhang during the 1997/98 Asian Financial Crisis.
However, effective measures taken by the government, through the MTEN, managed to save the country from 'double financial crisis' arising from (i) the attack by currency speculators on Malaysian ringgit and, (ii) 'property overhang' due to the non-performing loans (NPLs) in the banking system.
Policy implications
i. Residential home is a basic necessity. The overpriced of residential properties is now beyond the capabilities of most people.
ii. Factors contribute to the overpriced of residential property include (i) housing developers who made excess profits, (ii) speculators who manipulated residential house prices for quick profit gains, (iii) and low bank lending rates encouraged them to borrow and invest in the real estate sector.
iii. Real estate supply exceeds demand has been detected since 2007-2009, almost 10 years ago, but no constructive measures have been taken to monitor the situation.
iv. Policy makers and agencies, responsible for overseeing the housing and real estate sector - the Economic Planning Unit (EPU) and the Ministry of Urban Wellbeing, Housing and Local Government, must be more sensitive and proactive. The practice of ‘wait and see’ should be avoided.
v. Resolving the ‘property market bubble’ should not be relied on the idealized free market economy, where the prices for residential homes should be determined by the forces of supply and demand. Experience during the the Asian Financial crisis in 1997/98 shows that intervention in some policies by the government is needed.
Conclusion
Experience in other countries shows that the collapse of the real estate market can adversely affect the financial system and drag the country into an economic crisis. We certainly do not want this to happen in Malaysia.
From official statistics, Malaysia is facing 'property market bubble'. To what extent is the seriousness of property bubble in Malaysia today? What is the government's move to curb the problem from deteriorating? When will the bubble burst? If exploded, what will be the impact on the country's economy?
As ordinary citizens, we can only wait.
