DIRE: If the European debt crisis is not resolved soon, ripple effects may affect home owners who may still be paying off their loans
In my previous two articles (NST RED 13th and 20th July 2012), I examined the causes and events that led to Malaysians being caught in the “Malaysian Property Dilemma”. Like the situations in Ireland and Spain, the phenomenal increase in property prices in Malaysia during the past three years is fuelled, in part, by the abundance of bank loans with extended (30 years) repayment periods that are made freely available to those who apply. This surge in the availability of extended bank loans, almost overnight created a new and aggressive group of property-hungry Malaysians vis-à-vis Generation-Y, the 20s and 30s newly graduated and newly affluent young Malaysians.
Malaysian banks’ decisions and subsequent actions to increase their lending margins from 60 per cent in the 1960s and 1970s to 90 per cent (with exceptionally well-connected borrowers granted 95 per cent) in the 2010s opened a floodgate of demand for properties, especially residential units by Malaysians. The property industry in 2Malaysia, both the private and public sectors could not cope with the surge in demand. Consequently, the supply of properties in popular locations in the Klang Valley and in Penang slackened behind this avalanche in demand.
From then on the economic forces of “Supply and Demand” took over. Property prices, especially residential units in the Klang Valley and Penang began to rise steeply.
Let us now follow the movement of property prices involving condominiums in Hartamas Regency in Sri Hartamas, Terrace Houses in Jalan Setiajasa, Damansara Heights and Condominiums in Menara Binjai in Jalan Binjai, off Jalan Ampang, all in Kuala Lumpur during the period from January 2008 until December 2011 as they are listed below:- See Table 1
Stalemate in the secondary market: In my previous article (NST RED 20th July 2012), I commented that “there is now a stalemate in the secondary market” with sellers not willing to lower their asking prices and buyers not willing to increase their offer prices.
Affordability Test: In my previous article (NST RED 6th July 2012), after having analysed their respective incomes and expenses, I concluded 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:- See Table 2
From the above conclusions, I find that Malaysian house buyers simply cannot afford to pay the prices that the sellers are asking. These house buyers cannot afford to take housing loans from banks with monthly instalments of more than the RM2,960, RM1,720 and RM520 that the High Income, Middle Income and Low Income Families respectively can comfortably pay.
Why are Sellers not willing to reduce? It is logical to expect that Sellers, under pressure to sell are willing to negotiate with Buyers and reduce their asking prices. These Sellers logically should be willing to lower their price expectations when they have serious Offers especially at this time when there are not many serious buyers.
Why are Sellers not willing to compromise with the Buyers and reduce their asking prices? There are real problems that Sellers face that caused them to act so illogically.
30 years of financial obligations: In 2010, three Malaysian families separately purchased a Condominium in Hartamas Regency, Sri Hartamas, a Terrace House in Jalan Setiajasa, Damansara Heights and a Condominium in Menara Binjai, Jalan Binjai, all in Kuala Lumpur.
Their respective Financial Obligations are:- See Table 3
For the next 30 years, these three Malaysian Families will have Financial Obligations to the Banks as follows:- See Table 4
Mismatch of Affordability and Financial Obligations: We clearly have a mismatch of their respective “Affordability” and “Financial Obligations” vis-à-vis these three Malaysian families who had in 2010 separately purchased the Condominium in Hartamas Regency, Terrace House in Jalan Setiajasa and Condominium in Menara Binjai.
With monthly instalments payable to the Banks ranging from RM4,576 - RM4,710, we assume these three Malaysian Families are from the High Income Group earning RM14,000 monthly.
It is unlikely that the buyers are Malaysian Families from the Middle Income Group earning RM8,000 monthly. With only RM1,720 per month available to pay for the monthly instalments ranging from RM4,576 - RM4,710, it would be suicidal for these Middle Income Malaysian Families to buy these properties and assume such heavy monthly financial obligations for the next 30 years.
Income shortfall: There is now a shortfall (gap) between the respective disposable incomes available to pay Housing Loan Instalments and the actual amounts these three Malaysian Families will have to pay for the Housing Loans given to them. The monthly shortfalls (gaps) are as follows:- See Table 5
How did they manage? Prior to July 2011, before the European Sovereign Debt and Banking Crisis erupted, in addition to their RM14,000 monthly income (High Income Group) and RM8,000 monthly income (Middle Income Group), these three Malaysian Families could find extra money from trading stocks and shares in the stock market.
They were also able to participate in other business activities like Direct Sales and Multi-Level Marketing Networks where they can sell almost anything from the comfort of their homes. These “extra-curricula” activities helped to generate additional Income. With these additional income, these three Malaysian Families were able to find the extra money they needed to bridge the shortfalls (gaps) and faithfully pay the Banks their monthly instalments.
Since July 2011, the situation has changed. After the European Sovereign Debt and Banking Crisis erupted, first Ireland and Portugal, then Greece and now Spain needed to be bailed out. There is no solution in sight for how to effectively solve the European Sovereign Debt and Banking Crisis and save the world from another global recession and worse still a possible global Depression.
With Europe sliding into a recession, Malaysian exporters to European countries are reporting a slowdown in their exports. The USA and Japan are reporting a slowdown in their exports to Europe with Asian countries including Malaysia experiencing the ripple effects of declining American and Japanese exports to European countries. Consequently, Asian countries including Malaysia are beginning to see reduced exports to the USA and Japan. These are signs of the beginning of a global recession.
If the European Sovereign Debt and Banking Crisis are not resolved soon, Malaysia will be affected by the looming global recession. Our export industries will export less to Europe, the USA and Japan. With less money coming into the country, all round there will be less money available and consequently there will be less money in the pockets of Malaysian consumers who will spend less and buy only what is essential.
Many local non-export businesses will be affected with the shopping malls being one of the first to be hit. Following on the heels of a contraction in consumer spending, cash-strapped Malaysians will liquidate their shares to get the money they need to tide them over these difficult times.
What will happen to the three Malaysian Families who needed to find extra money from trading shares in the stock market and also from Direct Sales and Multi-Level Marketing Network trading activities?
What will happen to the three Malaysian Families?
In my next article, we will together find out what will happen to the three Malaysian Families.
Education, Information, Empowerment
Have you ever wondered aloud “How I wish I know the real market price of my property” or “How I wish I know how much to pay for the property I want to buy”?
You may want to visit http://www.ipropertydata.com and check out the price for yourself.
This column is endorsed by the National House Buyers Association of Malaysia (HBA) to educate, inform and empower house buyers in Malaysia.