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Saturday, September 18, 2010

A leaf from history

The world we live in has become very interconnected. Within an economy, what happens in one sector affects another. There is much correlation, for example, between the property and the banking sector.

But the fusion does not occur at just sectoral levels. It has gone global. During the euphoric bull run of the 1990s, Malaysia enjoyed tremendous growth for a good part of that decade with gross domestic product (GDP) hitting 10% in 1996. Much of Asia was caught up in an era of contagious exuberance.

During those pre-Asian Financial Crisis years, property prices grew, supported by stock market gains in Asia. The fall of the baht in late-1997 heralded the Asian Financial Crisis. It was a financial and banking crisis which affected the housing sector, says RAM Holdings Bhd group chief economist Dr Yeah Kim Leng .

When housing becomes out of reach, or when incomes do not keep pace with the price rise, and prices continue to climb, there will come a time when demand will shrink. An oversupply occurs. If this oversupply persists and prices become unsustainable, the property market collapses.

“Anything can trigger a collapse. An economic slowdown, for example. The trigger need not necessarily be property-related. The bursting of the bubble occurs when the housing market collapses. Prices fall and demand dries up. The next thing is, we enter a property recession, which we experienced in 1998,” says Yeah.

In that year of negative growth, property transactions also went into negative mode. The market bounced back quickly however. With the return of confidence, 1999 saw a surge in transactions both in terms of volume and value. Analysts call this a pent-up demand.

From double-digit negative territory, property transactions entered positive territory with double-digit growth. But the effects of the Asian Financial Crisis remained for subsequent years.

In 2004, the Kuala Lumpur City Centre (KLCC) and the Petronas Twin Towers became an address. Since then, high-end condominiums in the KLCC area have experienced phenomenal growth in prices of 60% to 100% between 2003 and 2008.

Henry Butcher Marketing Sdn Bhd chief executive officer Tang Chee Meng attributes the strong growth of prices in KLCC condominiums to the influx of foreign investors to the market after the Government announced the exemption of real property gains tax in April 2007.

Says Tang: “The state of the property market is very much dependent on the state of the country’s economy.”

“This can be seen in the strong correlation between GDP growth and the volume and value of property transactions during this 15-year period. The volume and value of residential transactions drop whenever the country experiences negative economic growth or a deceleration in growth. Each property cycle lasts between six and 10 years,” explains Tang.

However, this year has seen a negative in terms of both volume and value of transactions due to a lag time (see tables). The first quarter of 2010 will be transactions of quarter 3 and 4 of 2009, he says.

While analysts may attribute the escalation in property prices to demographics and the growing desire for lifestyle housing, Tang considers inflationary pressure as a major factor.

“The significant rise in building material costs in recent years has led to property developers raising prices. In some instances, softer market conditions result in the developers absorbing the costs instead of being faced with unsold stocks,” he says.

But inflation is not the only factor. The rise in incomes of the middle class has resulted in purchasers demanding better designed and higher quality homes. Social ills like rising crime creates a demand for security.

“So developers came out with gated and guarded communities and larger houses. Even the humble link houses have morphed into prestigious supersized homes selling for well above the RM1mil mark. The strong take-up rates of these types of homes have led to developers pricing their products at ever higher prices,” says Tang.

Based on NAPIC’s house price index, it can be seen that landed properties have enjoyed higher rates of capital appreciation compared to condominiums/apartments .

The supply of landed residential properties in Kuala Lumpur and, to a certain extent, in Selangor is quite limited due to high land costs which result in developers going for higher density development. As Malaysians generally prefer landed property if they can afford it, this has led to prices of landed residences being chased upwards especially in the current low interest environment, says Tang.

By The Star

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