Is now the right time to buy property/a house? 

In recent years, Malaysia’s property market has been experiencing stagnation in terms of price. The property industry has been struggling due to soft demand from buyers, subsequently exacerbating the current problems of high unsold inventories and rising unaffordability in the first place. 

In 2020, the pandemic has taken a toll on various sectors in unprecedented ways, and the property market was no exception. The pandemic has blown off the property market, with hospitality taking the largest hit, followed by retail and office property sectors. This all comes down to travel border closures, imposition of the first Movement Control Order and transition into work from the home setting, which subdued the demand for these properties. Surprisingly, the performance of residential property has been relatively stable throughout 2020 due to the laudable government initiatives such as bringing back the HOC (Home Ownership Campaign), which took effect from June 1, 2020 through May 31, 2021. Besides that, amidst the high unemployment rate and challenging climate in the property market, home buyers were quick to snap up deals due to the record low interest rate and six month loan moratorium. 

However, let us take a step back and review the performance of Malaysia’s property market over the last 2 decades. Prior to the Asian Financial Crisis in 1997, the property market was faring, with 18.4% price growth in 1995 and 12.9% in 1996. When the crisis struck, the property market crippled, house prices went up by a subdued 1.9% in 1997 before crashing by 9.5% in 1998, and property prices declined. The property market started recovering in 2000 and despite the Global Financial Crisis in 2008, the housing market plunge was not as severe as in the United States. In fact, right after the slight dip, the property market started to experience a boom, which was due to mainly two reasons: property speculation and banks taking part in a mortgage loan spree.

Chart 1: Percentage Change in Malaysia’s House Prices from 1997 to 2019 

(Source: iProperty) 


1. Property speculation

The property boom was largely in part due to property speculation. Following the 2008/09 US subprime crisis, in efforts to salvage the economy, governments around the world have aggressively employed a new monetary policy known as quantitative easing. Essentially, the government massively “pumped money” into the economy in order to increase money supply, subsequently lowering interest rates. The government is committed to reducing the interest rate to encourage spending and jumpstart the economy. As interest rate is a key macroeconomic indicator, it changes market sentiment. Inevitably, all types of asset classes were impacted, including properties. 

It seems that there is an inverse relationship between interest rates and property prices. In Malaysia, the record low interest rates together with active encouragement by the government then (such as the home ownership campaigns (HOC), Developer Interest Bearing Scheme (DIBS), waiver of stamp duties, extending loan tenures and financing limit) created a highly speculative property market from 2010 to 2015. In particular, the slash in real property gains tax (RPGT) rates is as part of an effort to assist those needing to meet cash obligation, especially for shorter-term disposals, thus, further fuelled property speculation. 

*Real Property Gains Tax (RPGT) is a tax levied by the Inland Revenue Board (IRB) on chargeable gains derived from the disposal of real property. (should i include this definition?) 

Moreover, following the GFC,  the rollout of The Klang MRT Project, owned by the MRT Corp, has improved market sentiment. In other words, investments in public transportation have played a significant role in revitalizing the property market from 2005 to 2015, where Kuala Lumpur house prices surged by almost 122% (73% inflation-adjusted).

Chart 2: Home Price Growth from 1989 to 2019 (Source: NAPIC)


2. Role of banks

It is also worth mentioning that the banks have largely contributed to the housing problems. Drawing on its traumatic experiences with the collapse of large conglomerates and bad corporate loans during the Asian Financial Crisis 1997, banks have been seeking alternatives to diversify their risk profile and rebalance their portfolios.  Hence explains the shift from corporate to consumer lending. As the banks engage in aggressive home mortgages at low interest spreads, the residential property loans grew a robust 12.4% a year from 1996 to 2019, well outpacing the banking sector’s annual loan growth of 7.5%. The shift of their target client subsequently led to the share of total banking loans surged from 12.3% in 1996 to 34.1% in 2019, while business loans fell from 59.3% to 31.2%, reducing credit availability to more productive sectors.

The implication of this? Inevitably, the increased availability of mortgage loans have fuelled home demand, consequently incentivizing developers to increase housing supply. Therefore, with the surge in property prices, it has created a speculative bubble. 

Supply overhang

Due to the rising home prices (and profit margins), no doubt the developers would want to jump on the bandwagon and rake in huge profits, leading to a building boom. While increasing housing supply serves to meet the market demand, nevertheless, if the population growth rate did not keep up with the supply growth rate, the developers can only build so much until it creates a headache for the economy, which is the property supply overhang. In other words, it reflects an area of the market where the supply of available properties is higher than demand.

In this aspect, the increase in home supply grew by an annual rate of 3.6% from 2015 to 2019. However, the annual population growth rate was merely at 1.6%. The stark difference between both growths, where supply growth was twice as large as the population growth, has resulted in declining take-up rates and rising inventories. 

In particular, as illustrated in chart 4 below, unsold properties worth more than RM250,000 have been on the rise since the property boom. While the government has taken measures to encourage uptake of the housing stock, the supply overhang persisted till today. This has been a rising concern among investors because it potentially causes a downward pressure on prices. 

Chart 3: Home Supply Growth from 2005 to 2019 (Source: NAPIC) 

Chart 4: Unsold Stock Levels for All Price Categories from 2009 to 2017 (Source: NAPIC)

Consequences of supply overhang

Since 2013, the growth in housing price has been declining, yet still positive. Unfortunately, if prices were adjusted for inflation, property prices declined in several places, including Kuala Lumpur, Selangor, and Penang throughout 2017. The National Property Information Center backs this statement, claiming that although Kuala Lumpur saw a 1.7% year-on-year increase in housing prices, however, once adjusted to inflation, there’s even been negative growth.

The oversupply in housing property can be a bad omen as it is largely attributable to property speculation. In addition, the overheated property market was the root cause of the Global Financial Crisis. Hence, the prevent history from repeating itself, the government has introduced anti-speculation measures, which are: 

1. Targeting Fly-by-night developers.

The fly-by-night developer is a connotation for fake property developers. These property developers lack experience in the property market and have no vision to develop the project successfully. They only have an ulterior motive, which is to make some quick money off unsuspecting buyers. Hence, with no standard procedure in place, the quality of construction is compromised, jeopardizing core structure of the property. To pre-empt this problem, the housing license project deposits of 3% of total estimated project cost were then introduced. Besides that, a total of RM500,000 fine and up to three-year jail term for developers who abandon projects, has been proposed by the Housing and Local Government Ministry.

2. Increasing capital gains tax.

Effective January 1, 2014, the Real Property Gains Tax (RPGT) has increased from 15% to 30% on properties sold within three years from purchase. For properties sold after four to five years, tax gain has risen to 20% and 15%, respectively, whereas no RPGT will be imposed on citizens for properties sold after six or more years. For non-citizens, RPGT on properties sold within a holding period of up to five years is 30%, while RPGT on properties sold within six years or more from purchase is 5%.

Chart 5: Real Property Gains Tax (RPGT) Act 1976 (Source: PropertyGuru)


3. The end of the Developer’s Interest Bearing Scheme (DIBS).

The DIBS scheme was first introduced in 2009 to allow developers to pay the interest on a property buyer’s home loan, during the time of construction. This is to lower upfront costs and to increase housing affordability. However, the government has forbidden banks from offering financing via the DIBS to address concerns over this scheme which was pushing up prices by as much as 30% in some developments, creating a potential property bubble.


4. Introduction of a Rent-To-Own (RTO) Program

The rent-to-own (RTO) program draws parallel to the concept of trying before you buy. It was introduced to allow Malaysians to own a property via renting, with the option to end with a sale. This program is favourable for first-time buyers because the tenant pays the landlord rather than a mortgage lender, hence getting the initial 10% deposit problem out of the way when it comes to purchasing a home. In fact, this program aims to support first-time buyers, thus, mortgage rates are relatively lower. 

 Home affordability

Despite the reduced pace in housing price growth, home affordability has been  significant concern for Malaysians. Many Malaysians find themselves having difficulties financing a home and the explanation for this is fairly straightforward – home prices have surged well ahead of income growth.

Chart 5 shows the growth in home prices versus income (measured by real GDP per capita) from 1990 to 2019. It is apparent that while average home prices have increased by a total of 5.6 times in a span of 30 years, the real GDP per capita income has grown by a total of just 2.8 times. Notably, during the housing boom, the growth in home prices has outpaced the real income exponentially before getting under control. Since 1990, growth of home prices has doubled, in other words, home affordability has halved. In translation, it takes 9.5 years of average annual income to buy an average home, double the 4.7 years that was needed in 1990.


 Chart 6: Home Prices vs Real Income Growth from 1990 to 2018 (Source: NAPIC)

However, sticking to the main discussion of this article, is now the right time to buy a property in terms of price? 

Due to Covid-19, the housing price has suffered a decline for the first time since the Asian Financial Crisis. According to the PropertyGuru Malaysia’s Property Market Index (MPMI), it was revealed that all four key markets of Kuala Lumpur (KL), Selangor, Penang and Johor saw a fall in prices for the first time in 2020. On a year-on-year (YoY) basis, the asking prices in Malaysian property fell 1.49% against 3Q19.

The country’s lockdown has undoubtedly depressed Malaysia’s property market, as uncertainties have decreased or delayed homebuyer’s decision to purchase a house. Weathering the storm through all the crises, property developers have come to learn that the key to survival in this industry is to maintain a survival cash-flow position, for example, it is crucial to pay off its labour worker, otherwise, it would have to terminate its project altogether. Hence, banking on the low borrowing rates during the pandemic, developers are more willing to forgo a portion of their profit margin and sell at a lower price. Essentially, survival calls for a healthy cash flow. With that, the once dominated property market by sellers has shifted to a buyer’s market. 

The follow up question then unfolds, will housing prices fall any further?

While the rollout of the vaccination program at the time of writing has connoted the light at the end of the COVID tunnel and the recovery market sentiment may signal a rebound in the downward housing price. However, buyers’ expectations for a continued drop in home prices may be dashed because, according to Datuk Soam Heng Choon, president of the Real Estate and Housing Developers Association Malaysia (Rehda), the current property price has “hit the rock bottom.” Besides that, the Master Builders Association Malaysia (MBAM) deputy president Oliver Wee Hiang Chyn also concurred that the pandemic has adjusted the market and houses are priced competitively and more affordable, which matches the income level of the local buyers. 

The rationale for this “rock bottom” is due to the surge in indirect construction input costs, such as temporary shutdown of construction sites, lack of skilled workers and higher standard of worker’s living and working facilities. In other words, “The selling price is a reflection of the additional construction cost due to the pandemic.” However, Datuk Soam pointed out that for secondary market properties, the traditional property hotspots remain popular even during an economic downturn, where its price will not succumb to lower demand. This is due to the land scarcity, which supports the price and popularity. For instance, demand for landed residential properties near the Mid Valley area will remain intact as there will not be any suitable land left for development.

Ultimately, it all comes down to the location, and the underlying notion is that prime locations like these will be able to weather the storm & firmly hold up to its price. This is because if there is a sudden price drop in a property hotspot, it alludes to a fundamental problem in the country, as the property market often tailgates the country’s economy. 

2021 outlook

With that said, there are signs that the market might recover faster than some might believe. In fact, according to research, as many as 81% of Malaysians want to buy a house by the end of 2021.

Considering that residential property prices are expected to remain stagnant owing to lower interest rates, under the HOC, homebuyers with cash should take advantage of developers’ incentives or rebates, such as full exemption for stamp duty for first-time homebuyers on properties below RM500k, RPGT exemption & rent-to-own scheme in the primary market. However, although this is an excellent opportunity to finally  own your own house for a first time buyer, it should not be the reason for emotional purchase because buying a property is the largest investment in our lifetime. Hence, buyers should always evaluate their cash flows and remember to do their research before purchasing any property.

Researcher: Vanessa Wong

Reviewer: Elizabeth Lee

Editor: Arivaasaran Arjunan

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