Home Prices to Fall as Recession Hits in 2018

In light of the recession set to hit Malaysia by 2018, economic affairs analyst Prof Hoo Ke Ping expects prices of medium and high-end residential properties to fall as it becomes harder for property speculators to secure bank loans, reported Free Malaysia Today.

Since 1960s, the country has witnessed a recession almost every decade, noted Hoo.

He revealed that the recession in the early 60’s was caused by global rubber prices, by the ringgit crash in 1967, and by global rubber prices in 1970. The recession in the 80s was caused by a property crash and outflow of funds, while that in the 1990s was due to a currency crash.

“In 2008, we experienced another recession but we managed to pull through very quickly. The 2018 recession is expected to hit almost all sectors,” added Hoo.

With this, the next two-and-half years may be the best time to acquire a medium to high-end home.

This is because the property market had begun to show signs of easing six months ago after speculators failed to secure tenants or buyers or bank loans for their properties.

In fact, a condominium unit priced at RM500,000 in 2012 is now going for RM420,000, while some homes are almost RM100,000 cheaper, said Hoo.

He attributed the hike in property prices to Bank Negara’s delay in curbing property speculators from acquiring and selling homes under the Developer Interest Bearing Scheme, in which the “willing buyer willing seller” concept is exercised.

In 2012, Bank Negara finally introduced stricter regulations on market speculators. The delay, however, had resulted to a property bubble with artificially inflated property prices.

As the fake demand spurred developers into building more homes, around 1,000 houses in Penang, 3,000 in Johor Bahru and 6,000 in the Klang Valley would be left vacant.

To overcome the fake demand, Hoo urge Bank Negara to tighten bank loans for property developers in order to force them to sell completed housing units at a cheaper price.

“Most of them built the properties in 2013, when the prices were still inflated. Even if they sell the remainder of their unsold units at a cheaper price, they will still make money.”

Be A Responsible Property Investor

New developments and the rising concern of property oversupply in the market is caused by many reasons, one of them being irresponsible property investors. It is becoming more common for ‘gurus’ to come out and share how to make ‘instant’ money via a vehicle termed loan compression, but little do buyers know that they are headed for a financial crisis if they do not know what they are doing.

There is no doubt that property investment is one of the safer long term investments out there in the market, and below are some criteria that the good gurus will follow.

Responsible Investment

A real property investor is one that studies his lessons properly before jumping onto the bandwagon. He does not just join one or two classes before buying his first dozen properties within the next few months.

The most important aspect that property investors should take into account before buying their first property is mapping out their exit plan for the property before buying it. In terms of exit plan, they will need to understand when to let go of the property. Is it when the property is 10 years old, or is it when the property has gained a capital appreciation of 30%?

And then they will also need to understand how much returns or negative cash flow that they will get upon buying the property. If the property will be yielding a negative cash flow, they need to take into account:

• Where will they get the money from to pay for it
• Why are they buying the property in the first place – is it because it has strong potential for capital appreciation in the coming years?

The Proper Way of Refinancing

Another aspect that gurus will strongly preach to their ‘followers’ is refinancing. Refinancing is a method of waiting for your property to appreciate in price and then going to the bank and getting a new loan for it.

So for example if your property is worth RM500,000 in the current market and you get a 90% loan for it, you will be able to get RM450,000. And after about 10 years if your property is worth maybe RM800,000, you will be able to refinance it – and depending on how much you get, you may be able to get up to another RM270,000 in cash.

However, if done wrongly, refinancing without proper planning will ensure that the borrower ends up in debt forever as their tenure will remain the same. A good guru will teach its students how to avoid this trap.

Proper Research

Performing proper research on a neighbourhood is another one of the main aspects of buying a property. You will need to understand the area, research its background, and study its future. A great example is Kota Damansara.

When Kota Damansara was just being built, it was “a jungle” which everyone predicted would fail. All the naysayers have now however been proven wrong. A shop lot that cost only RM400,000 during its launch now costs approximately RM1.6 million.

For established neighbourhoods, what a buyer would need to check out is the subsale value and rental yields around the neighbourhood. This is to get a rough idea of how much they can expect in returns and capital appreciation.

How to go about hunting for these deals

In as comfortable as it sounds when somebody tells you that they will find you the perfect property for a fee, sometimes is better to know how to do it yourself so that you don’t get hoodwinked. A good guru will teach its students how to find the deals themselves so that they will know the ropes.

Wrapping up, property investment is a great long term investment, where if done properly you will be able to earn a decent amount in the long run.