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Saturday, March 13, 2010

Determining property prices the healthy way

BANK Negara’s decision to raise the overnight policy rate (OPR) by 25 basis points on March 4 must have jolted many people out of their slumber into realising that the days of low lending rates may be numbered.

While some Malaysians, especially those who are risk-averse and prefer to keep their savings in banks, are rejoicing that interest rates on deposits are on the way up, there are those who must be apprehensive that they will have to fork out higher loan interest payments.

Those in the second group, including corporate and retail borrowers, should recognise that the low interest rates that they had been enjoying for close to two years came at a cost.

Malaysians generally have a high propensity to save and the all-time low interest rates have been frowned upon by savers, especially the retirees who are mostly dependent on their interest income to get by in their golden years.

It is only fair that they be compensated for their prudence – a strong trait among Asians that may have saved the region from further financial quagmire brought on by a widening sovereign debt crisis in some western economies.

The recent OPR hike will certainly not be the only adjustment by the central bank, considering the country’s lending rates are still at record lows.

We can expect more upward adjustments in the coming months as there is still room for rates to rise at least another 50 basis points should Bank Negara act in response to a stronger local economy.

Normalising the interest rates by allowing it to be decided by actual market forces of demand and supply is certainly more healthy.

Although there are now more avenues to invest one’s savings, property is clearly a favourite.

Most of the big property companies are raking in record sales and some of the projects, especially those in Penang and the Klang Valley, are once again selling like “hot cakes”.

Although there is no property bubble – a situation where prices escalate to artificially high levels that do not reflect the actual market fundamentals of demand and supply – there may be a chance of this happening if we are not careful.

We only have to look at the many condominium blocks in the Kuala Lumpur City Centre locality. Their prices have fallen by up to 30% as demand for high-rise residences is still quite lethargic, with no signs of a recovery anytime soon.

The huge price correction can be attributed to a high percentage of investors and speculators in that market segment compared with the owner-occupier buyers.

Hence, there is a need to rein in speculation in our property market. Higher interest rates also signify confidence that the market will hold out well.

It will complement the move to reinstate the real property gains tax, albeit at a flat 5% for all property sales within the first five years of purchase.

Curbing excessive speculation will help prevent overheating in the market.

Property prices should be determined by actual demand and supply forces and not by artificial means.

● Deputy news editor Angie Ng hopes the normalisation of interest rates will ensure a more balanced and healthy property market – one that is not too expensive for the common folk.

By The Star

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