KUALA LUMPUR: Higher interest rates are likely to dampen demand for property, but the extent of it will depend on the strength of economic growth.
RHB Research analyst Loong Kok Wen said that with higher interest rates, sector valuations are cheap, but given the negative headwinds, re-rating catalysts seem remote.
The bank-backed research firm prefers affordable landed township developers with ongoing matured developments and asset owners amid the rising interest rate environment.
The firm maintained its 'Neutral' recommendation on the real estate sector, with Matrix Concepts Holdings Bhd and IOI Properties Bhd as its top picks.
"Based on historical data since 1991, transaction volume typically falls when the average lending rate is revised up, and vice versa.
"Essentially, transaction volume or housing demand will likely fall when Bank Negara Malaysia raises the overnight policy rate (OPR) progressively over the next two years.
"The decline (in demand) would also depend on whether the economic growth trajectory remains intact. Any slip in gross domestic product growth could worsen the drop in housing demand," noted Loong.
She said that assuming the Malaysian economy continues to recover, the property demand decline may still be relatively moderate, as mortgage rates by the end of 2023 would still be comparatively lower than the 4.5-4.6 per cent levels recorded five years ago.
Also, home buyers should be able to adapt to the higher interest rate environment over time.
"However, as the risk of a recession emerging in western countries is growing, and although the potential downside risk to economic growth may delay the speed of interest rate hikes, demand for property will still be negatively affected, as unemployment rates may rise," she noted.
The firm's cautious outlook is because year-to-date impairment on residential mortgages is up 14 per cent yearly.
Home buyers tend to be more sensitive to rate hikes amidst an inflationary environment, as every 25 basis point hike in the OPR will lead to a 3.2-3.5 per cent rise in monthly mortgage repayments.
"Growth prospects for this remain tepid, as the demand for property and market sentiment are typically sensitive to various economic factors.
"Nevertheless, the persistent supply glut has already capped the house price increase over the past four years, and the overhang issue will likely stay longer as unstable economic growth will affect the speed in unwinding unsold units," she added.