Housing bubble in malaysia

Over the year 2010, I have encountered many customers & friends’ asked about the question of housing bubble. Involve in this trade, the question also raise great interests for myself. From various publication and seminars read/attended, most experts shared that we are not in a housing bubble

As the year closing, I would like to share my opinion.

US has experienced housing bubble recently and subsequently the market was collapsed altogether in 2008, and now still struggling to recover. One bailout after another. Stimulus plan, QE1 and now QE2. Tax cut extension. Seem like the US economy is beyond cure already, RIP.

Some history:
1929 – US great depression – Housing price stagnant but no dropping.
1979 – US great recession – Housing price stagnant but no dropping.
1984 – US recession – Housing price stagnant but no dropping (except state like California but very little)
2000 – US dot.com bubble – Housing price stagnant but no dropping
2008 – Subprime mortgage lead to credit burst – Housing market collasped, price dropped average 50%, some 80%

US housing price increased average 3.3% annually in tandem with inflation rate from 1920 till 2000, then raised at a higher rate until 2008 when price collapsed for the first time in US history. Banks, builders, developers, house owners get burnt very badly. Without bailout, we would not hear company like Citibank & AIG anymore. How severe!

Why housing price collapsed only in 2008 but not the previous recession before? One of the key factors is the deterioration of house ownership equity (HOE). Due to FED’s low interest rate policy and GLC’s (Fannie Mae and Freddie Mac) guaranteed home mortgage encouraged banks’ reckless behavior to grant loan even to sub-par borrowers. This has stimulated, of course artificially the property market that subsequently attracted many people, not only property flippers, speculators and developers, ordinary people such as teachers, newly migrants and etc to join the once in the life time money making opportunity. Low interests rate not only making house mortgage more affordable, but also cheaper for the developers to build. When property glut started to accumulate, some properties failed to attract buyer and those with poor holding power started to default, even as early as 2006. Research showed the less than 3% of the default cases eventually snowballed to more default when banks due to bad loan, have to start tightening by raising interests rate. BOOM! The bubble has finally burst. HOE in 2008 was just 46% compare to over 70% throughout 1920 to nineties.

In 1997, Hong Kong experienced the worst housing crisis and price drop substantially too but there’s no big developers & builders filed for bankruptcy. And the number of housing lelong (HK vs. US) was like kitty compared to dinosaur. Why? The HOE in HK back then was over 70%. Yes, people badly burnt too but many still able to own their property.

Note 1: If the house is without any loan, HOE is 100%. If house price is 100k, loan 50k, then HOE is 50%.
Note 2: There’re more reasons for US credit crisis.

For Malaysia, I don’t know the HOE figure because couldn’t find it yet (Please let me know if you have it). But if we take pre-1997 era vs. now (2009 till now), few things could be use to ‘forecast’ it.

First, bank’s credit requirement is more loosen now (as compared to pre-1997 era, for instance (i) home loan normally 85% max during that time. (iI) Car loan max 4 years. (iii) There was no personal loan back then, and there are many more…). Second, loan tenure has increased from 30 years to even 40 years for some banks. Third, policy makers encourage home ownership more than pre-1997 era. Fourth, government 2 stimulus injections one in 2008 (smaller) and another in 2009 (much bigger). Stimulus put in simply, more money flow into the markets (stock, real estate, public work, blah blah blah). Firth, interests rate now is much lower than pre-1997 (average at 8%, peak around 12%), low interests rate discouraging people to save. Sixth, any reasons that I don’t know.

Based on these, it’s not too difficult to know whether the HOE is high or not. Thus, it can be assumed that the current HOE is lower than before.

Malaysian household debts / GDP is getting close to 80%. The second highest in Asia. This figure can tell if economic is not doing well, the ability to pay back the debt becomes very tough for the average Malaysian. This will increase the risk of default.

House price / Annual rental ratio is getting higher in Klang Valley (I’m not familiar at other places). Just pay attention to neighborhood, house price (commercial units also) easily increased by double digit by quarterly basis. But what about the rent? If I increase the rent say 20% yearly, tenant doesn’t have too much difficulty to find substitute (this imply over supply).

Low HOE + over borrowed/leveraged + over supply + …. + ….. = High bubble risk. But without a trigger. Things are fine.
What is the trigger? Economy growth.

Conclusion: Even with these figures (HOE, household debts & housing rental ratio, and other factors not mentioned here), it is still not easy to answer if we have housing bubble or not, or if we have one, will it burst or not. At best, it gives good indication on the risk level of the real estate market. The rest is leave it to you.

OK, that’s it. Wrote too much already. So, don’t ask me about housing bubble questions again, huh. ;-)

Thanks everyone and happy new year!

Update 10 August 2011