| It has generally been a wonderful forty years for property investors in Malaysia. During this period, property prices have gone up significantly. In the early 1970s, double-storey terraced houses (today they are better known as link houses) in Petaling Jaya and Kuala Lumpur were selling for about RM30,000 while detached houses were going for about RM60,000. Today, the average price for the former is about half a million while the latter is going for nothing less than RM3 million! That is some growth! And because of this spectacular performance, a lot of people, including yours truly, made handsome gains from property investment, running into tens and evens hundreds of thousands. In fact, I would dare say that most Malaysians gained their highest profit from their investment in properties. Further, looking from a national perspective, everybody wins in a rising market: The investors, lawyers, bankers, real estate agents, developers and even the government. More stamp duty collected, more profits made, more employment, more taxes collected and even the land is put to more productive purposes. For the investor, the formula would appear to be simple – pick a right location, and the rest would fall into place. Further, because we can borrow money, lots and lots of money, for property investments, the gain are even higher when compared to using our own capital. For example, if we paid cash for a RM100,000 property, we would double our money and realize a 100 percent gain when the price rises to RM200,000. However, if we bought five properties instead (by paying a total down payment of RM20,000 and borrowing RM400,000), our gain would be RM600,000 or 600 percent! (I'm ignoring incidental costs such as legal fees, stamp duty and bank charges for the purpose of comparison here.) Of course, if the price rises higher, then the gains would also climb up with it. At the same time, I must admit to be getting cold feet in recent days about the whole concept. The property market, like the hedge funds, is built on debt. We borrow eighty, ninety and sometimes the full hundred percent of the price of the property to finance the purchase. And that, needless to say, is very high leverage. This partly explains the spectacular growth in property market – it is fueled by debt. (Other reasons are the rising income and population growth.) And because of this, prices went up significantly higher than if it was based purely on our own capital. Actually, rightly or wrongly, as long the prices keep going up, it is all systems go and the party continues. Everyone makes money, everyone is happy and everyone is a genius. However, the same thing – debt – that led to the spectacular growth could be the very thing that brings it down to its knees. Investors may not want to believe this but prices do not rise to the sky. It has to have some semblance to reality. Of course, in the short term, anything can happen. Prices can and do get whacked out of sync every now and then. This can be seen very often with stocks. Sometimes, the price of a stock can shoot up way above 'normal'. The reverse can also happen when bad news about the company spreads. Prices can drop like a stone, way below realisitic levels. As the saying goes, 'The market can remain irrational longer than you can remain liquid.' Now the same thing can, and do happen, with properties as well, though not as regularly as stocks. And dear readers, the current property prices in Malaysia are at stratospheric levels. When a double-storey link house cost half a million ringgit, the price is out of sync with the real world. For anyone to afford to buy a half a million ringgit house, he probably need to take a loan of some RM450,000. That would mean a monthly repayment of RM3,096 (loan period of twenty years and 5.5 percent interest). Even if he took a loan of 'only' RM400,000, it would still mean a repayment of RM2,752 a month. Now how many families in Malaysia can afford to set aside that much money a month just for their mortgage, bearing in mind that they have other commitments as well? There are families that can afford this of course, but most would find it difficult to do so. So what I'm trying to say here is that such price levels cannot be sustained for long. It can rise but it cannot be sustained. And when that happens, the party can end real quick and real bad when prices turn down. Actually, some people are already feeling the pinch because the honeymoon period of their mortgage is over. (The honeymoon period is when the interest rate is lower than the BLR.) Now that the initial two or three years honeymoon is over, the interest rate reverts to the actual rate which can be double or higher than the honeymoon rate. This partly explains the rising number of properties being repossessed and auctioned off. However, this is small potatoes when compared to what can happen when prices turn down – and it will turn down. When the supply exceeds demand, the party will soon end. And when it turns down, things can get real ugly for the unprepared, the naive and the greedy. A lot of people will be hammered by a double whammy: (1) the value of their property drops, and (2) their monthly repayments increases significantly as the interest rates rises. In fact, the monthly repayments could increase by 30 or 40 percent from present levels if the interest rates shoot up to double figures. And when that happens, a lot of people will find it difficult to make the repayments. This will lead to the banks repossessing the properties and then auctioning them off. As for the investors, many will be out in the streets. Many could be eaten alive by their monster mortgages. Those investors that once looked so smart and inteligent because they bought a string of properties by borrowing to the hilt will now look so not-smart and not so-intelligent. At that time, they will realize, too late of course, that debt is a two-edged sword. It can not only cut down their enemies but tragically also the owner. But of course, wherever there is danger, there is also opportunity. We'll talk more about this next month.
Copyright © Azizi Ali 2011 |
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