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Monday, August 17, 2009

Have we bounced off the bottom of the property cycle?

It was barely a year ago that property prices were plummeting.

Since then, the world’s central banks have flooded the markets with an unprecedented liquidity tsunami that has lifted prices of assets like stocks and property. Liquidity comes in many forms, the most evident and tangible is lower interest rates, which immediately lower mortgage costs and allow potential borrowers to borrow more with the same level of disposable income.

It also reduces the returns on deposits which make it more attractive for depositors to redeploy their funds into higher yielding and more speculative assets like shares and property. Other forms of less tangible liquidity measures involve providing cheap funding for banks and printing money.

In China, the liquidity came in the form of generous lending by state-owned banks which boosted lending in the first half of 2009 by 7.37 trillion yuan (RM3.8 trillion) – 2.3 times the amount of loans issued during the same period last year.

Some would argue that policymakers are creating a bigger bubble to counter the effects of the one that just burst. It was the bursting of the property and debt bubble in the United States that precipitated the global financial crisis.

The global liquidity tsunami appears to have succeeded in arresting the fall in global property prices. The mother of all property indices, the Case Shiller Composite 20 Home Index – which measures property prices in 20 US metropolitan cities – saw its first month-on-month rise in May 2009 after falling 33% from a peak in July 2006. The peaking of US house prices was followed by the global financial crisis two years later, so hopefully a bottoming of US house prices is a lead indicator of better economic times. Home prices in the United States are less overvalued after the price correction but are not particularly cheap as they have risen more than the inflation. Nevertheless, the affordability of the homes has improved as interest rates have declined.

The stabilisation of the US housing market is crucial as it means household wealth will also stabilise. Higher household wealth, closely tied to property and stock prices, will boost consumer sentiment. This in turn could boost US consumer spending and, hence, Asian exports. It would also boost the US economy as consumer spending accounts for 70% of the US economy.

However, it would appear that any recovery is likely to be muted as unemployment remains high and households are still deleveraging from high debt levels.

Ironically, a weak recovery and the deflationary effects of excess capacity will allow policymakers to keep interest rates low for a long time. After all, policymakers are unlikely to want to raise interest rates prematurely and be blamed for tipping the economy back into recession. Property prices and transactions in Asian countries like China, Hong Kong, Singapore, Taiwan and South Korea have risen from depressed levels in the first quarter of 2009.

In fact, the prices for the Housing Development Board (HBD) units, in which the majority of Singaporeans live, are at an all-time high. Low mortgage rates of less than 2% in Singapore have helped boost property prices. This is good news for property owners but bad news if you are a new graduate aspiring to own a property.

In Malaysia, lower interest rates, a buoyant stock market and better consumer sentiment have combined to boost demand for properties. Bargain hunters queued for properties launched by Island & Peninsular in Bandar Kinrara and Glenmarie and IJM Land in Jelutong, Penang.

Property companies are generally seeing better demand for property, and property agents are seeing renewed interest from home buyers.

Ironically, the rental market is not improving due to the ample supply of new property at a time when economic activity remains weak. The new supply of high-end condominiums and office space in KL is arising at a time when some multinational companies are downsizing. Higher supply and weak demand are likely to translate into lower rentals but not necessarily lower property prices as the alternative is to invest in deposits yielding only 2%.

This phenomenon has been observed in many countries like Hong Kong, Singapore and Taiwan where rental yields are at only 2% as deposit rates in those countries are at 1% or less. In the end, the effect of this liquidity is to punish the savers and reward borrowers with high risk-taking behaviour. Nothing much has changed despite all the touted reforms and we are on the way to creating a new bubble which would hopefully compensate for the current downturn before it eventually bursts.

In the meantime, property prices and property stocks are likely to rise in the liquidity-induced asset price inflation. The prices of property stocks have risen sharply from their lows in March 2009. The larger property stocks in Malaysia and the region are priced more than one times book. Many smaller property stocks are still trading at below one times book and offer more attractive valuations.

The party is on, the participants are intoxicated with liquidity but when the music stops, make sure you are not the player caught without a chair in a game of musical chairs.

● Choong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd. Readers’ feedback is welcome. Please email to

By The Star (by Choong Khuat Hock)

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