Property bubble: fact or fantasy?

BUBBLY: Dr Ernest Cheong puts forward a spirited rebuttal of Sunway Berhad’s Tan Sri Jeffrey Cheah’s recent statement that there will be no property bubble in Malaysia

Tan Sri Jeffrey Cheah, the Chairman of Asian Strategy & Leadership Institute (ASLI), who is himself a prominent businessman and property developer, was reported by the Star Biz on 29 August 2012 to have said:
“Among the challenges the industry faces is the market perception that the industry is heading towards a property bubble, which is not backed by reasonable evidence.

“As a developer, I’m convinced as of now that we shall not be (note the word “shall” in the prescriptive is used) experiencing any such property bubble, as our property prices are still affordable compared with some of our neighbouring cities in the region.”

There are four main messages in Tan Sri Jeffrey Cheah’s statement above:

1. The market perception is that the property industry (property market) is heading towards a property bubble.
2. This market perception is not backed by reasonable evidence.
3. Malaysia shall not be experiencing any such property bubble.
4. Property prices in Malaysia are still affordable compared with some of our neighbouring cities in the region.

What is a property bubble?
A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic estate market. It is characterised by rapid increases in housing prices until they reach unsustainable levels and then decline.
The financial crisis of 2007–2010 was related to the bursting of real estate bubbles around the world, which had begun during the 2000s.

Did Malaysian property prices increase rapidly?
For the answers, we will examine the movement of prices of terrace houses in Overseas Union Garden, Taman Desa, Bangsar Baru, Damansara Heights and Taman Tun Dr. Ismail and condominiums in Sri Hartamas and KLCC areas all in Kuala Lumpur from as early as 1981 until 2011 as they are listed below:
See Table 1

What can Malaysian families afford to buy?
We shall now follow the fortunes of three Malaysian families: High Income family earning RM14,000 per month, Middle Income family earning RM8,000 per month and Low Income family earning RM3,000 per month.
See Table 2

We find the three Malaysian families with their respective monthly family incomes of RM14,000, RM8,000 and RM3,000 have available surplus income to repay Housing Loans as shown below:
See Table 3

Affordability test: I conclude that the High Income Family (RM14,000 monthly income), Middle Income Family (RM8,000 monthly income) and Low Income Family (RM3,000 monthly income) can only afford to buy the following property types with the respective affordable Housing Loans as follows:
See Table 4

I conclude that compared with Malaysian families’ financial ability and affordability, the prices of two-storey terrace houses in Overseas Union Garden, Taman Desa, Bangsar Baru, Damansara Heights and Taman Tun Dr. Ismail and condominiums in Menara Binjai and Hartamas in Kuala Lumpur, except for a two-storey terrace house in Overseas Union Garden, are way beyond the RM550,000 price range that Malaysian families can afford to pay. I find this conclusion to be a very depressing and discouraging scenario, as shown in the table below:
See Table 5

“Our property prices are still affordable”
Tan Sri Jeffrey Cheah as quoted by the Star Biz on 29th August 2012.

Premised on the above information and analysis of the comparative figures between actual prices of properties in Kuala Lumpur and the ceiling price of RM550,000 that Malaysian families with monthly incomes of RM14,000 and below can afford to pay, is Tan Sri Jeffrey Cheah’s statement that “Our property prices are still affordable” a true representation of the actual situation and reality facing Malaysian families today?

Tan Sri Jeffrey Cheah’s statement revisited
We shall now examine the four messages as follows:

1. The market perception is that the property industry (property market) is heading towards a property bubble.

The characteristics of a property bubble are:

i) Rapid increase in property prices.
ii) Property prices reach unsustainable levels.
iii) Property prices then decline.

We shall match these characteristics of a property bubble with the rapid increase in the prices of 2-storey terrace houses in Overseas Union Garden, Taman Desa, Bangsar Baru, Damansara Heights and Taman Tun Dr. Ismail and condominiums in Menara Binjai and Hartamas Regency all in Kuala Lumpur as representative of the movement of property prices in Kuala Lumpur.
See Table 6

Premised on the above analysis, do we see evidence that property prices in Kuala Lumpur have reached unsustainable levels?
Property prices in decline: When there is a mismatch between the level of property prices and what Malaysian families with monthly incomes of RM14,000 and below can afford to pay, the economic forces of supply and demand will eventually take over. With all these high-priced properties chasing the few Malaysian families still able to afford to pay, the imbalance between the increasing supply of high-priced properties available for sale and the shrinking demand from the small pool of Malaysian families willing and able to pay will eventually cause the prices of these properties to decline and fall.

This third characteristic of a property bubble has not yet happened. Are we seeing the characteristics of a property bubble happening now?
I believe that, based on the above, characteristics (i) and (ii) of a property bubble have actually happened.

2. This market perception is not backed by reasonable evidence.

In respect of this statement, I have a question to ask Tan Sri Jeffrey Cheah:
“Dear Tan Sri, the Star Biz quoted you as having said that the market perception that the property industry (property market) in Malaysia is heading towards a property bubble is not backed by reasonable evidence, are you satisfied that the facts and empirical data as detailed above represent what you deem to be reasonable evidence that the property industry (property market) in Malaysia is heading towards a property bubble?”

3. Malaysia shall not be experiencing any such property bubble.

In respect of this statement, I have a question to ask Tan Sri Jeffrey Cheah:
“Dear Tan Sri, if you do not accept that the facts and empirical data as listed and detailed above represent what you deem to be reasonable evidence and you do not accept their veracity, then by the same token, please provide us Malaysians with ‘reasonable evidence’ to back your statement that ‘Malaysia shall not be experiencing any such property bubble’ and convince us, Malaysians that what you said is true.”

4. Property prices in Malaysia are still affordable compared with some of our neighbouring cities in the region.

In respect of this statement, I have a question to ask Tan Sri Jeffrey Cheah:
“Dear Tan Sri, by what yardsticks are you making this statement? How do you reconcile your above statement with the fact that Malaysian families with monthly incomes of RM14,000 and below can only afford to pay a ceiling price of RM550,000 for their homes and the fact that most medium -range residential properties in Kuala Lumpur are priced at RM600,000 and above. Please provide us Malaysians with ‘reasonable evidence’ to back your statement that ‘Property prices in Malaysia are still affordable’ and convince us, Malaysians that what you said is true.”

The path to financial ruin: In my previous article (NST RED 31st August 2012), I asked the question: “Are we Malaysians and is Malaysia on the path to financial ruin? Are we heading to where the likes of Greece, Ireland, Portugal and Spain are: National Financial Crisis and even possible National Financial Ruin?

There are now ongoing active debates on the fate and future of us, Malaysians and our country, Malaysia on the subject “whether the Malaysian property market is heading towards a property bubble” or “the Malaysian property market has already entered into and is in the early stages of a property bubble”.

For those Malaysians who deny that the Malaysian Property Market is heading towards a property bubble, if they are right, we will celebrate their insights and wisdom. However, if they are wrong and the Malaysian Property Market have already entered into and is in the early stages of a property bubble, what would be the impact and consequences that we Malaysians and our country Malaysia will likely face?

Can we believe what the property industry tells us?
To answer this question, I quote from Wikipedia’s report on Ireland that “In Ireland, many bank economists, media commentators, estate agents, property developers and business leaders went on the record to state their belief that the Irish property market was healthy, and that any decrease in house prices was indicative of a soft landing only”.

Were the bank economists, media commentators, estate agents, property developers and business leaders in Ireland correct and accurate in their statements and their beliefs? We all know the answer. Today Ireland is suffering from one of its biggest and most damaging property bubbles that their business leaders went on record to state that the Irish property market will not experience and will not suffer from a property bubble.

The property bubble actually burst in Ireland. This is a historical fact that cannot be denied.

In Malaysia, we have been told by bank economists, media commentators, estate agents and property developers that ‘Malaysia shall not be experiencing any such property bubble’.

Conclusion: Malaysians, I invite you to consider these two questions:

1. Is the Malaysian Property Market heading towards a property bubble?
2. Has the Malaysian Property Market already entered into and is in the early stages of a property bubble?

Malaysians, you be the judge! Your answers to these questions and your subsequent actions will greatly impact upon your lives for the foreseeable future which will likely determine you and your family’s ability to survive the impending economic recession that is already happening in Europe and the United States.

This column is endorsed by the National House Buyers Association of Malaysia (HBA) to educate, inform and empower house buyers in Malaysia.

Disclaimer: The views here are solely the writer‘s own personal views and NST RED does not necessarily agree with or endorse those views.

 

 

 

 

 

 

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