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Monday, May 9, 2011

Rate hike to have little impact on property market

KUALA LUMPUR: Bank Negara Malaysia’s (BNM) recent hike in interest rates may do little to dampen the property market as demand is expected to continue amid rising inflation.

Analysts said demand for property was expected to continue growing as the trend of rising rates was merely a normalisation process as previous lending rates were “too low”. Additionally, there was still plenty of liquidity in the market.

“The rate hike was expected, and there is generally still a lot of liquidity in the market. And the demographic is such that there is still a lot of demand for property.

“Property is a big hedge against inflation so people are still looking at it. The rate hike would not have a significant impact on the property market,” an analyst told The Edge Financial Daily.

Given the rising fear and the uncertainty about inflation, the analyst said interest in the property market was not about to wane anytime soon.

BNM raised the overnight policy rate (OPR) by 25 basis points (bps) to 3% on concerns of inflation. The increase in the OPR will result in an increase in the country’s base lending rate (BLR) which could negatively affect domestic spending and the property market.

The central bank also increased the statutory reserve requirement (SRR) ratio by 100bps to 3%.

In a recent report, CIMB Research noted that loan applications for residential property showed a strong rebound in March with a 74.1% increase from the previous month. The research house said the rebound could have been driven by borrowers who rushed to lock in low interest rates in anticipation of higher borrowing costs in the near term.

Property prices have been on a steep uptrend in the last two years. CIMB said house prices in Malaysia rose last year at an average gain of 6.7%, the strongest in the past 13 years, including the mid-1990s property boom. The Klang Valley alone enjoyed a strong rebound from the contraction in 2009, with Kuala Lumpur recording the steepest appreciation of 12.2%.

However, the analyst noted that the increase in property prices had moderated.

“While property prices are not going down, the increase is slowing down or stabilising. Still, it may be a bit too soon to say property prices are cooling,” he said.

Industry observers noted that property prices in Southeast and North Asia, especially in heavily ethnic Chinese populated areas, had generally been resilient.

Apart from blips caused by financial crises, prices rarely pulled back due to strong demand because culturally, properties are viewed as good investments or a hedge against inflation, the observers noted.

CIMB noted that the 33% jump in property transaction value in 2010 came as a surprise as it expected the rebound to be 10% to 15%.

“For the overall market, we expect transaction value growth to slow down to around 15% to 20% as historically, growth has never sustained at 30% for more than a year and the base of comparison is also much larger,” CIMB said in its report.

Escalating property prices have been a much talked-about topic of late as the rapid inflation in asset prices has made it difficult for young adults to own houses.

CIMB said the affordability index for residential properties in general slipped slightly last year.

Additionally, Malaysia’s household debt was growing making home ownership difficult.

BNM’s Financial Stability and Payment Systems Report 2010 showed that an average Malaysian household’s debt service ratio (the ratio of the debt payments to disposable income) was at 47.8% last year.

This implied that nearly half of Malaysian households’ disposable income went towards repaying debt, a ratio which suggests that either household debt is too high, or incomes are too low.

The government is embarking on means to make housing more affordable. It was reported that it was in the initial stages of establishing a national public housing authority similar to the one in Singapore that would build affordable, quality homes.

In the longer term, some quarters expected more supply to come onstream in the near future, which could ease property prices.

Some expect to see a correction in prices later this year or early next year, as interest rates continue to rise and governments around the region take more steps to cool property demand.

An industry observer also noted that a number of properties sold with minimum upfront and deferred payment schemes would also be completed within the next year.

By The EDGE Malaysia

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