FOR those who are interested to know about the health of the residential property market, Bank Negara Malaysia’s article “Developments in the Residential Property Market” (https://bit. ly/373eyeg) is a must-read.
The article, published in Bank Negara’s latest Financial Stability Review, states that house prices in Malaysia are seriously unaffordable at 4.7 times median house price to annual median income (median multiple). A house is considered affordable if the median multiple is 3.0 or below.
Why do Malaysians find houses seriously unaffordable? On the supply side, there is a mismatch due to market failure to provide enough affordable housing. On the demand side, housing affordability is limited by insufficient income and high indebtednes for some.
I think buyers’ buoyant sentiment or fear of missing out (FOMO) also contributes to the high median multiple or price-to-income ratio.
The most probable reason why investors buy houses is because they think the price will go up further. Yes, the current house prices are high and stagnating, but they reason that in the long term, prices will maintain their upward trend.
For investors, property investment can be even more lucrative compared to stocks because they can have a bigger leverage, which make their returns much higher if prices go up.
Also, they do not receive margin calls even if prices decline as long as they can service the monthly mortgage repayment.
For owner-occupiers, one of the reasons for buying houses at the current high prices is the fear that if they do not buy now, the price may go up later.
In the same article, Bank Negara pointed out that 57.3% of approved housing loans in the second half of 2021 were granted to owner-occupiers. Presumably, the other 42.7% of approved housing loans were granted to investors.
Researchers at the Federal Reserve Bank of Dallas, United States, recently published a study titled “Real-time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble” (https://bit.ly/36zs0jj).
Here is what they say: “But real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue.
“If many buyers share this belief, purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house price gains.
“This self-fulfilling mechanism leads to price growth that may become exponential (or explosive), resulting in the housing market becoming progressively misaligned from fundamentals until investors become cautious, policymakers intervene, the flow of money into housing dries up and a housing correction or even a bust occurs.”
The study listed the many consequences associated with explosive appreciation in real house prices. “Expectations-driven explosive appreciation (often called exuberance) in real house prices has many consequences, including the misallocation of economic resources, distorted investment patterns, individual bankruptcies and broad macroeconomic effects on growth and employment.”
I think an extreme example is Japan. For 30 years or so since 1950, house prices in Japan had only gone up.
Property prices rose by as much as six to seven times during the 1980s asset bubble as Japanese house buyers, whether investors or owner-occupiers, were all piling into real estate for fear of missing out based on the belief that prices could only go up.
Property prices in Japan continued to rise until the early 1990s and then started a drastic decline. Even some 30 years later, they have still not recovered.
In sum, should the FOMO sentiment be prevalent, prices will continue to be high relative to income or rent until the trend changes.
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