Please stop reading if you're in property price will not go down camp. Take own responsibility if you still persist to go on. Don't blame the author for making your day bad.

Fact is the real estate market has slowed and the signs of further slowing is growing every single day.

Forget about U.S and E.U, everyone is tired about the gloom and doom there.

Better shape countries like Taiwan (don't argue, is a sovereign country and maintaining its own military), China, Korea and Australia face difficulty to maintain economic growth. For example, Australia coal, iron ore and copper export has slumped. For the past 6 months, Australia total home sale has dropped and recorded the widest drop in July 2012. Price in some second tie markets for high end sector (>AUD1m) has dropped significantly as much as -40% or more.

China fresh grad unemployment rate reached double digit this year (check Al-Jazerra latest documentary on China graduate). ZhuShanJiao 珠三角, Guang Dong Province (the locomotive of manufacturing hub in southern China), area like Dong Guan registered NEGATIVE -11 GDP contraction due to large numbers factories closure.

Though China official GDP is 7.1% but the reliability is quite questionable. China financial market is not reflective the entire picture because shadow banking plays a large part for the medium/small enterprises. Last year reports of massive shadow banks run begin to surface from WenZhou, ZheJiang Province which has alerted Wen to intervene. Australia, Korea & Taiwan export to China begin to contract in 2012 and China electricity production did not grow from 2Q, 2012. It tells us the situation there is not good at all.

Those in Malaysia who believe the property price can be sustained and grow (maybe slower) despite the economy gloom and doom around the world is living in fantasy.

Property price can only be sustained if you and me, brother/sister, your friends and enemies, good or bad neighbor, untie and uncle.... ALL, is able to continue paying the installment and rent on time to bank/landlord regardless of how bad the economy will become. The market really don't need many people failing to do their commitment for destruction the working of the financial chain.

Fictitious case. Just for illustration. A 3 years old condo with 400 dwellings. All in one size 1000sf, bought all in one price RM350k (now market price is RM500k) and 80% of them bough with 90% bank loan. When recession hit, 2% of them losing job and 3% of them have pay cut. So, 5% of them have problem to repay installment. 1% of them have saving while 1% of them, family can help out. Then left the 3% under water and foreclosure is inevitable. 3% is equal to 12 units of houses, is now on lelong. Let's say the lelong price is RM500k and under such economic downturn and large number of lelong is available, finding taker posses its difficulty. So, auction price has to be reduced, say, -10 to RM450k. If a different owner, financially better shape, want to sell his property now in an open market, he is not likely to find buyer at RM500k. Like it or not, RM450k is the realistic price (if there is taker of the auction price at RM450k. If not, further reduction is expected). When only half of the auction houses are able to sell, the remaining 6 will be further reduced. What if after further reduction, still no taker? Well, banker has to shoulder the liability without cash flow. When the vicious circle spread, it will force the market to raise interests rate as bankers now is facing reduction of cash flow. When interests rate adjusted upward, we can imagine the the ugly picture followed

To believe the property price can be sustained or rise is equal to believe all the parties in the chain can do their part without failing. All of us know very well, it's not possible.

When the export drop which is happening now, the affected companies is going to bite the bullet and under such circumstances, the problem of laying off surplus labors and suppliers is inevitable in order to survive. Chain effect: our neighbor working in those companies and friend who is supplying the material to the companies and our government who collects tax from those companies. People spend less and .....

It is a tough time ahead, friends.

Obama is trying hard to reelect in Nov 2012 and he, as well as Mitt Romney will try their best to win voters than curing the economy (U.S has just reached 16 trillion deficit 2 days ago but who is talking it now? Still remember all the huhu-haha in Aug 2011 when deficit hit 15 trillion mark?). Angela Merkel will face the same as Germany election going to take place by latest of next year. China, just settled the recent largest political scandal involving the influential Bo Xilai, make no difference. China main focus now is the 18th National Congress of Commuinist China soon to be held. Who will take charge after Hu/Wen will be decided. Thus, it can be speculated that those politicians are buying time time for the moment.

You have made an important point!

Building has depreciation cost. What make the value up is the rate of land price appreciation (scarce & limited naturally) outpacing the rate of building depreciation. Many 'modern people' forget this simple rule.

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Added on August 31, 2012, 10:59 pmHigher interests rate in Australia show the central bank there know what they're doing.
Higher required down-payment provides better home equity for the owner and safety net for the lenders. Speculative buying is minimized.

Australia central bank practice is much more conservative and prudence. Malaysia, honestly, is quite lax relatively. Even in Thailand, the down payment is 30% and China, coastal city as high as 50% (recent rule is 2nd home in 1st tie city is 80%!!!). In the event of recession, though property price can drop but the financial institution there has much bullet to cushion the sudden value drop. Besides, Australia & China has massive reserve and lesser debts.


This post has been edited by agentdiary: Aug 31 2012, 10:59 PM

Please tell us more specifically:

1. What precautionary measure that will kick-in in the event of market crash that will balance the market (if so unfortunate happens)?

2. Market correction. Please enlighten us how real estate market correction works.

3. What is inflation? And what inflation lead to?

I can only see your point valid if a large majority buy house CASH or lesser loan. Fact is: Most buy on leverage. That's my main concern.

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Added on August 31, 2012, 11:19 pmPlease explained.

This post has been edited by agentdiary: Aug 31 2012, 11:19 PM

Yes, central bank decides interests rate nowadays but there is a limit to what they can do in the event of financial problems like crisis or serious recession. For instance, sudden contraction of money supply, default or high inflation expectation. Similar cases: 70s inflation, US S&L crisis, 1997 AFC & E.U PIIGS sovereignty crisis.

I'm not a doomsayer but a realist.

Like watching soccer to others, researching on financial crisis is my hobby. Stumbled across the financial crisis for the past 100 years, and conclusion that I wish I am wrong is: we're at one and just get prepared.

Richard Russell, ”In a depression, everybody loses. The winner is the guy who loses the least.”

P/S: To believe central bank manipulation is an antidote to economic problems is naive and stupid.

In response to some comments:

Interests rate matters the most in any leveraged investment, equivalent to production cost for a factory.

Central bank control interests rate but there's a limit. Don't agree?, you have to learn the full mechanism of interests rate manipulation by CB.

Take a look:
1998-1999 is the worst recession we ever experienced so far, if CB was so powerful, why didn't it push down the interests rate to below 6% instead of 9% to revive the economy?

Though impossible to cover AFC here but if put thing in brief, Malaysia financial market was hit by the fled of RM. The fled of RM is triggered by over leveraged of financial system (also have other causes) who mostly borrowed short and lending long. The over leverage was caused by over extend of massive projects during the boom year. Competing for fund, raised interests rate and cause "carry trade" very profitable (speculator like George Soro spot it). About 10 years prior to AFC, Plaza Accord and Reversed Plaza Accord, 2 massive currency manipulation of USD/Yen made Asian miracle possible through huge liquidity. Ultra super very brief version. The point is interests rate matter a lot.

Somebody may ask how come FED can do so (low interests rate) in 2008 till today? The FED started injection of QE1 (followed by QE2, OT and operation to maintain 0.25% till 2014 (this is QE already!)). China in response by injecting 1.4T (in total), Malaysia in response by 2 round stimulus packages & lower down rate in 2009, Japan, Singapore, Thailand..... did the same respectively into their system. This is only possible (everybody follow to inject stimulus $$) due to the USD world reserved currency status that still command over 80% of world trade. Eventually every participants are 'rewarded' with own version of property booms.

Just that the by-product is inflation. They may continue it (low interests rate) as long as food price and crude oil stay below 2008 peak. But, the food price seem like can't hold any much longer. Latest food commodities trend.

This is not even counting the USD1.6T still sitting inside the FED statutory reserved by U.S banking system. Possible scenario, it will go into the system to commodities or stock or somewhere. Trigger point, I guess when the bond yield is no longer able to outweigh the loss from the real inflation (not the FED official CPI) as it goes higher.

Malaysia property market is surely not as crazy as U.S, Iceland. China property market look more 'stable' to me, cause the average home loan is far below 70%, and buying second home in coastal city require at least 60% down, no typo, is min 60% down. For them, the Chinese, interests rate matter less.

But within Malaysia context, we are at the hype never seen before in our history. I really can't cite any example, not even the pre-1997 era when we enjoyed the highest economic and real income growth in history, can't even match the current real estate price appreciation in just a couple of short years.

I am not giving any advise here. It is just my half cent opinion (lost one and half cent from inflation).

1) Without consent/approval from BNM, do you think banks can reduce % from the BLR?
2) How private bank can set interests rate without the ability of open market asset purchase & SRR setting which is only available by BNM?


Obviously you don't understand the operation of central banking & interests rate.