I'm always amused by the widespread use of emotive metaphors when it comes to property, as it leads to some genuinely funny observations. And of course, you absolutely are correct many (not all) of the DDD camp have in fact "missed the boat", hence the bitterness and sour grapes.

Nonetheless, and solely for the purposes of lightening the mood here, isn't it also correct that if you try to step off the pier when the boat has already left, you are likely to end up at the bottom of the ocean?

Apologies for digressing. Please continue on.

Of course, just a joke my friend. Now everybody, back to arguing.

Cheers

The impending reversal of QE shows the fickleness of hot money flows. Hot money flows, just like asset price bubbles, create their own self-fulfilling prophecies.

As usual, this thread has degenerated into a mess of ad hominems. All in good fun of course, but not a very fruitful discussion.

Nevertheless, has anyone cared to comment on the impact of the tapering of QE in the regional economy? The ringgit has fallen considerably relative to the USD. Where is the money flowing out from? Government Bonds? Our KLCI hasn't fallen that much.

Anyway, why is QE relevant?

To my mind, the fundamental value of property on a *macro* basis hasn't changed at all in the past 5 years. By macro, I mean the attractiveness of property vis a vis other asset classes, and the attractiveness of Malaysian property vis a vis property in other countries. What has changed is the perception of the investing public as to the attractiveness of property as an investment class. Whether that perception shift is permanent, or whether it will reverse is still an open question, hence the present debate.

I note that the momentum of rising prices has already faded, and this sucks a lot of speculative euphoria out of the market. I'm therefore trending towards a reversal in the trend, but only if there is a systemic shock to the economy because prices will remain sticky in the context of our kiasu culture. One candidate which I have been monitoring as a factor for a systemic shock is the outflow of foreign funds following the end of QE. A reduction in liquidity, the fall in the MYR and a fall in the stock market will lead to an increase in interest rates, and a reduction in the wealth effect, thereby reducing the demand for luxury products like fancy houses.

Any thoughts?

I am not exactly sure where we disagree, and perhaps I simply misunderstand you. I do acknowledge that my knowledge is as yet "half baked", hence my need to resort to forums such as this for ideas.

With regard to tapering, the Fed has been remarkably consistent with past pronouncements thus far, even with respect to controversial policies, and it has been a key part of recent Fed policy to communicate clearly its intentions and to follow through in order to guide market expectations to respond rationally. I think the tapering will occur as stated, even if only for the sake of consistency, but the details may vary depending on how the economy reacts. This is more an issue of political science than economics, and is subject to even greater guesswork and uncertainty than the murky field of economics.

I am in total agreement with you that Malaysia's property market bull run is essentially a credit bubble which is slowly running out of so called greater fools. Common sense dictates that when loan growth outstrips GDP, the excess money created is directed towards pushing up asset prices.

BNM statistics (http://www.bnm.gov.my/index.php?ch=en_publication_catalogue&pg=en_publication_msb&tpt=bnm_2011&mth=5&yr=2013&lang=en&eId=box1) shows that in the past 5 years, quarterly residential property loans have doubled, and quarterly non-residential property loans properties tripled. In order for prices to continue rising at the same pace as the past 5 years, we need the same rate of loan growth. I don't see how that's likely to happen considering that household debt is bursting at its seams.

Nevertheless, where I disagree with the DDD camp is that bubbles such as this need not end in a burst. If there is no needleprick to jumpstart the cycle of fear and paranoia, and prices may simply stagnate. You must agree that, unlike most other asset markets, property prices tend to be sticky downwards. Prof Keen lost a bet when he predicted that the Australian Property bubble would burst back in around 2007-2008. Your analogy involving speculators depends on how many speculators there are relative to the greater pool of investors. The anecdotal evidence suggests that there are many, but there are no numbers out there to know for sure.

Heh, full disclosure I'm more interested in macro rather than property. The real effect of QE is difficult for most people to understand. As far as I am concerned, QE does not directly create "real" money. Endogeous money growth depends on a combination of loan supply and loan demand, with loan demand being the more important factor since banks are not really constrained by reserves. QE just increases the incentive for banks to lend (i.e. increases loan supply) by literally drowning them in reserves, and this helps to creates more money in the same way that lowering interest rates does before it hits zero. The extremely loose monetary policy caused by QE and zero rates encourages more bank lending, but with the US in an environment of deleveraging down from high levels of debt, there is limited demand for new debt. This then leads to a carry trade where loans are taken in the US at low interest and invested overseas in emerging markets like Malaysia for higher yields.

Would the US stop QE even before the US recovers? This question requires some understanding that QE is not without side effects. Extended periods of excessively loose monetary policy encourages excessive risk-taking and further imbalances, and may set up the economy for another bubble down the road. At all times the Fed weighs the risk of deflation against the known and unknown side effects of QE when making monetary policy. The BIS (which was the only major agency that predicted the crisis) has long warned that excessively loose monetary policy even in bad times will lead to more pain and imbalances down the road.

My thinking is largely in line with his except that I hold 0% gold. Never been a fan of gold because gold has no real fundamental value. Indeed, if the world moves back to the gold standard, the value of gold will skyrocket. Yet, from the political science perspective I don't agree that the world could possibly move away from fiat money, partly because of the very fact that this would cause the value of gold to skyrocket.

Anyway the question of when interest rates will go up has always been uncertain up until very recently, hence I would have agreed with Mark's statement at the time of his article that the "when" was unknown. Yet, the latest announcement by the Fed on the tapering of QE is some indication of future interest rate movements, as reducing QE performs the same function as increasing interest rates. While it is foreseeable that US interest rates will stay relatively low, the open question is how low? It's all a question of degree. If by end 2014 QE has ended but interest rates are still zero, we would still be in low interest rate territory, but US monetary policy would be substantially tighter. My concern is what would a marginal tightennd pace as the change in US rates, as tapering QE significantly tightens monetary policy even if US interest rates remain low.ing in US monetary policy do to foreign funds sitting around in emerging markets? It is not clear that the change in hot money flows would be at the same rate a

Thanks for humoring my random rants.

The news is relatively neutral, as it doesn't contradict what is already expected. Rates will stay low for a long time, but interestingly enough the Fed also indicated that QE may end as early as late this year. For our purposes, QE is very important as it drives excess reserves towards Asia to chase yields. In my view, QE is largely to blame for asset bubbles emerging all over Asia. A reversal of QE will indicate a reversal of this trend, a reduction in domestic liquidity, and a cause for a reversion in domestic rates to the norm. On the other hand, long term low rates in the US would serve as a buffer against excessively high interest rate hikes in Malaysia. This is because high Malaysian rates will generate a profitable carry trade moving cheap money back from the US to Malaysia, pushing interest rates down again.

On a macro basis, my view is that the most likely scenario is that we are headed towards a stagnation / slow burn downwards simply because BNM isn't going to allow debt levels to outpace GDP growth much further. Without debt growth, there is simply no new money to sustain higher prices. Contrary to popular opinion, higher prices are caused more by credit growth than income growth. (Note: If, contrary to my expectations, BNM does allow debt levels to rise (central bankers are often incompetent and wrong, see e.g. Alan Greenspan), we may be facing a a full blown financial crisis in the next few years, and not just a property crisis that indirectly affects the financial sector. You can refer to the BIS study on private debt levels to GDP for guidance on this matter)

At best, prices will be maintained as sellers transfer their debt to buyers. However, without the prospect of future appreciation, a lot of speculative demand will dry up (most high end condos are empty, signaling a high degree of speculative demand in this segment at least), adding downward pressure to prices. Further, at current purchasing prices even a slight increase in interest rates due to the withdrawal of QE will push installment payments above rental yields, disincentivising new buy-and-rent-out investors from purchasing from earlier buy-and-sell-on investors/flippers.

A crash is always possible depending on whether there is a perfect storm of domestic and global economic problems (e.g. Australia had a debt problem around the same magnitude as the US, but the commodities boom kept the property market afloat for almost 7 years after the US market tanked.), but without the intellectual capacity to time a crash with sufficient precision (at least I admit I do not), it may not make sense to everybody to plan their lives around it.

As always, I invite comment and criticism of my admittedly half-baked and ill-informed layperson views.

Just to correct a slight misunderstanding here, California, Miami (in Florida) and LA (which is in Cali) were what pundits called Ground Zero for the US housing crash. Those places were the ones with 40-50% crashes, whereas other, less developed parts experienced 20-25% crashes to give an average national figure for the US housing crash at ~35%. See especially the massive collapse in Southern California, which was surprising considering how wealthy the area was. Florida was just as shocking, and I personally see quite some similarity between Florida and the Penang market. New York on the other hand experienced the same thing as London, i.e. just a minor blip notwithstanding that the rest of the country was falling apart. This seems to show that global financial centres that are swimming in foreign money have completely different fundamentals from the rest of the country, and are partially inoculated against domestic financial concerns. Is KV the same? Theoretically, it may be safer than Penang or JB because there is "some" foreign money, but it is certainly not a global financial centre.

Sadly, it appears that few in Malaysia have real knowledge on what went on during the US housing bubble. South California was one of the wealthiest places in the US, and their median prices bottomed out at about RM 750k.

http://www.nuwireinvestor.com/articles/a-b...tate-53126.aspx



Here's a chart for you: http://www.doctorhousingbubble.com/wp-cont...home-prices.png

As I recall, Florida did around the same or worse than SoCal, but I can't spoonfeed all the details. Prices in both places are recovering, but we are after all 6 yrs from the peak, in an environment of zero interest rates and QE and many government initiatives to help homeowners, so the recovery is by design. Like I said, I was only seeking to correct a misunderstanding that desirable and wealthy places must always hold value in order to guide this forum's discussion back to the use of accurate facts and examples. Debt and liquidity is always the most important factor. You should be looking to places like London, NY and Sydney to justify why our values will maintain.

In any event, it is far fetched to suggest we will ever suffer a 50% crash (apart from multimillion luxury condos of course). Although it is clear to me that current pricing levels are not sustainable by our fundamentals, I do not subscribe to the belief that a massive crash must necessarily follow. It is just one of many possible outcomes, and is dependent on a myriad of factors, political and economic, domestic and international. With so many factors at play, there is no way to predict with absolute certainty, so one must hedge their risks. My view is that holding too much debt at this point in time is foolhardy, as the chances that it may work out well is growing slimmer every day. The unfortunate fact which I distill from these forums is that many in Malaysia have no hope to achieve wealth aside from wagering away their lives (multiple 40 year mortgages) on the property market in the hope that prices will continue their upward spiral. I wish you all the best, although the very fact that there seems to be no feasible way to achieve wealth other than gambling on highly leveraged asset appreciation must tell you that something is seriously wrong with the economic fundamentals of this country.

Singapore gives a good example of leasehold values because the place is littered with 99 yr HDB units. Basically value holds up until the leasehold hits 85-90 years, and then it starts declining rapidly vis a vis freehold.

If I may refer to an interesting article I just read:-

http://www.malaysia-chronicle.com/index.ph...3#axzz2ZJr5kvH7

If the numbers are correct, this shows that a lot of the growth we have had in ASEAN is not due to improving fundamentals, but rather due to transient foreign capital chasing yields, and this supports the notion that the flow of "hot money" is currently the biggest risk factor for liquidity in our economy. Hot money is inherently volatile and unpredictable and the timing of a reversal of this trend is as much a question of economics as it is a question of political science.

Do note however that the tapering of QE is expected to be gradual, and one significant difference from back in 1997 is that we have ~RM433 in reserves.