From the Edge last week...
ECONOMIC crises always affect housing prices the same way, property experts tell JENNIFER GOMEZ and DAVID YEOW. They have some advice for buyers.
This is because both property prices and mortgages are bound to come down further, as they have done at the onset of every economic and financial crisis over the last three and a half decades.
Ravindra Dass Property Services Sdn Bhd managing director Datuk Ravindra Dass is well aware that he will come under fire for giving such advice at a time when developers and those wanting to liquidate by selling their property assets are looking high and low for buyers.
But the first Malaysian director-general of the Valuation and Property Services Department at the Finance Ministry insists that this will save potential homebuyers regrets when prices fall in coming months.
Dass' predictions are spot on: on the ground, there have been fewer property transfers since early this year, says Klang Valley-based real estate agent, See Kok Loong.
In the Kuala Lumpur City Centre area, for example, demand for high-end condos is only half of what it used to be.
"In the case of one particular high-end luxury condo, its RM1,000 per square foot price tag last year has come down to RM800, but the concern is that it will go down even lower, to RM700, in four or five months," Dass says.
However, See predicts prices will not go down to developers' price levels and the housing market will stabilise as "having a home is an ever-present need".
Developers, hit by lower sales volume and laden with excess supply are promoting various packages to woo buyers, says See.
Among them are schemes that allow buyers to only start paying their mortgages 12 months after the property is completed, low interest rate offers by the developer and rental guarantees.
"Those who want to buy and those who want to wait for prices to go down further will have to balance this decision with the reality that during better times, these packages would not be available," says See. "Some buyers look forward to the security of a rental guarantee scheme whereby rental income on their investment is guaranteed for a certain period."
Another property expert points out that even if prices go down further after a purchase is made, values would eventually go up and the loss would not be felt in real terms as long as the buyer keeps the property for the longer term.
But Dass counters that seasoned investors would still want to go in at a "low price for maximum gains".
In any case, potential second homebuyers should not take his advice lightly, although those looking to buy a home and occupy it themselves should just "go ahead with their need".
According to Dass, there is a strong 10-year cycle for property downturns which come on the heels of an economic recession -- as seen in 1973/74, 1984/85 and 1997/98.
"It can be predicted but I think nobody, including developers, wants to accept that it could come back and haunt us."
Dass points out the recurring trend: the performance of the stock market over the last six months was a clear indicator that the property market was going to take a dip, as was the higher rate of foreclosures and auction sales going on since six months ago.
The stock market has been on a steady decline since September last year, while the Kuala Lumpur Composite Index fell by about 24 per cent during this period.
In the 1997 financial crisis, which had an "Asian flu" effect, gross domestic product dropped from 7.6 per cent in 1997 to 4.6 per cent the following year.
The KLCI fell from 1,278 points in February 1997 to a low of 267 in July 1998.
Subsequently, the number of property transfers fell by 32.2 per cent, while property values dropped by 47.8 per cent over the same period.
This was aggravated by overbuilding by developers which started from 1995.
As a result, terrace house prices in urban locations within the Klang Valley, in the popular RM250,000 to RM500,000 price range, fell by almost 50 per cent.
Dass added that in 1997, the property market started picking up by mid-1999 and peaked in 2005/2006. This was when developers went on their building spree, buoyed by the confidence in the economy.
"In 1985, the gross domestic product was at zero per cent and average prices of two-storey terraced houses in Klang Valley's urban neighbourhoods had dropped to RM160,000 from RM285,000, while office rentals in the Golden Triangle retreated from RM3.50 psf to RM1.50 psf over the span of a year.
"Subsequently, the property market picked up in 1987 and went on to register record highs in property values in 1995/96 when the market peaked," he added
"As such, it is plainly obvious that when the stock market takes a hit, the property market starts to stumble. This usually happens between six and 12 months from the time the stock market goes on a decline."
According to Jones Lang Wootton Malaysia executive director, Malathi Thevendran, the tell-tale signs that the high-end condominium market was moving into a downturn were the high future supply in the development pipeline and the intense speculation (particularly from foreigners) last year, which pushed prices beyond a reasonable level.
Back in the middle of last year, Jones Lang Wootton's quarterly property market report had cautioned its subscribers at a time when many property market players still believed the market had upside, she recalls.
Her advice to an average investor who, for example, is planning to buy a second home for rental income purposes would be to remain cautious and selective.
High-end condominium purchasers should generally adopt a "wait and see" position as a general buyers' market evolves this year. The decision to buy will depend on whether the investor can get an acceptable rental for the property.
The high-end condo market has a limited pool of renters, generally expatriates and companies. Spurring demand in these particular sectors in the current downturn will be difficult.
But, Malathi says, there may be some good opportunities to purchase well located, high-end condominiums once developers realise the market will have to come back to more affordable "local" pricing levels from the peak prices, fuelled by the frenzy of foreign speculators last year.
So, to buy or not to buy? It's for you to make that decision wisely, remembering what happened to property prices in the past three crises.
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