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Saturday, July 25, 2009

To boost or not to boost property

Property is not just any investment because if the costs spiral, everyone is affected for good – and for bad.

HOW many of you all out there want property prices to rise? If you said “yes,” you are probably already highly invested in property, a property developer, a property agent or someone else who has vested interests in property prices rising.

If you said “no,” most likely you don’t have a property and aspire to buy one, if not soon, then in the foreseeable future. And you will be in the majority because most people in the country don’t own properties.

So let’s establish the first point in our argument: Most people don’t want property prices to rise because they do not own property yet, even if it is just a modest house.

But there seems to be a general feeling that rising property prices are good, so much so that some have argued that a multi-billion-ringgit high-speed rail link between Singapore and Kuala Lumpur will be good because it will raise KL property prices by narrowing the differential with Singapore prices.

Although it is not clear how such a situation will happen (even with a high-speed rail link, I don’t see anyone living in KL and travelling to Singapore daily or vice-versa), the assumption that higher property prices are generally good for the country is simply not valid.

That’s the key point to remember when we encourage foreign investment into the property sector, arguing that Malaysian property prices are relatively low. If enough foreign investors buy the argument, property prices will rise.

Yes, some will argue that only high-end property prices will rise because this is the segment that foreigners will be investing in, but there are knock-on effects which will inevitably work their way down into the entire property sector.

If high-end property prices rise, Malaysian buyers who would have bought at the old price would be pushed into the next lower tier which would push the prices of that tier up and so on. Eventually property prices will rise across the board – that’s economic certainty.

But that does not mean foreign investment in the property sector should not be encouraged. There should probably be substantial restrictions in the residential sector but ownership of office, commercial and industrial properties should be substantially liberalised.

There is less likely to be great speculation here because much of the needs will be based on requirements of foreign and local companies here.

Therefore, price spirals, bubbles and collapses are likely to be less severe as long as there is some oversight of the rate at which new properties are developed. But it is different for residential properties.

One wonders whether foreigners should be allowed to purchase even high-end residential properties. Such moves often price prime quality properties out of the affordable range of locals.

Worse, some developers of local properties, especially those with foreign links, actually offer the best space to foreigners first, with these not being made available to locals even if they could pay the asking prices!

Developers, of course, have a vested interest in enlarging the pool of people that they can sell too. The greater demand will inevitably raise prices and give them fatter margins. But the cost is that Malaysians have to pay higher prices for these properties and eventually other properties too.

Singaporeans have generally been very content with their government for all the development it has brought to them. But they are unhappy with one thing – the high price of quality residential projects because of foreign purchasing which has pushed these properties beyond their affordable level.

We really don’t need that here. From a macroeconomic point of view, if one considers the ringgit to be undervalued as many do, liberalising property purchases effectively means that foreigners will be picking up local property at attractive, discount prices.

We don’t want to create a property bubble. What we want is movement of property prices reflecting underlying economic trends.

Property prices should increase along with the real demand for them, which means actual people living in them and paying for them or the rental for the properties.

The recent collapse in property prices around the Petronas twin towers should be an instructive example.

When property prices rise because of hype and speculation without real people to occupy them; it’s a matter of time before you have big buildings and no lights at night. And, eventually, fallen prices.

As economic prosperity increases, and everyone becomes richer, property prices will increase by themselves and keep pace with the overall increase in incomes. Even as property prices increase, they will still remain affordable. Everyone will be happy but none too much.

Like for all other investments, speculative inflow of funds into the property market can lead to unwelcome volatility as well as steep rises in prices followed by steep falls. That’s not good for most people.

Managing editor P. Gunasegaram is an interested party – he has property.

By The Star (by P. Gunasegaram)

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