Continuation from Version 1 which was quite a hot topic with 2646 posts and 135,824 views since 15 Nov 2013:

https://forum.lowyat.net/topic/3031756


The collapse of the US housing market bubble emphasizes how important it is to figure out what property is really worth, from a fundamental perspective. Make sure you’re not over-paying!

There are 4 yardsticks to avoid buying in bubble markets:

•Price to Rent Ratio (or Yield)
•Relative Prices
•Affordability
•Price of new builds


VALUATION TOOL 1: THE PRICE TO RENT RATIO

The gross rental yield) is the housing parallel to the price/earnings ratio. Here is a set of rules of thumb for the housing market:

VALUATION YARDSTICKS FOR THE HOUSING MARKET

PRICE/RENT RATIO GROSS RENTAL YIELD (%)
5 20 Very undervalued
6.7 15 Very undervalued
8.3 12 Undervalued
10 10 Undervalued
12.5 8 Borderline undervalued
14.2 7 Fairly priced
16.7 6 Fairly priced
20 5 Borderline overvalued
25 4 Overvalued
33.3 3 Overvalued
40 2.5 Very overvalued
50 2 Very overvalued

But there are exceptions to this. When strong future growth in value is expected e.g in areas where transport infrastructure is being upgraded then relatively weak present earnings can be acceptable.

There are several good reasons why people should pay attention to the 'valuation parameters':

Higher rental yields push the housing market higher

If rental yield levels are high, this will tend to mean that the interest cost of buying a house is low, compared to the cost of renting a house:

•Potential buyers will pay less to borrow from the bank (in order to buy) than they pay when renting a house. Many will move from being renters to buyers.
•Entrepreneurs will find it makes sense to buy houses to make money, i.e., buy in order to rent them out.

Both these factors put upward pressure on house prices.

Lower rental yields put downward pressure house prices

If rental yield levels are low, this will tend to mean that the interest cost of buying a house is high, compared to the cost of renting a house:

•Potential buyers will find that to buy a house involves paying much more to the bank, than it costs to rent a house. Buyers, especially first-time buyers, may have difficulty financing housing. Banks will be worried about over-lending at loan-to-income ratios which mean that a slight increase in interest rates will mean financial crisis for the borrower.
•Entrepreneurs will find that buying-to-let won't pay.

The house price can be viewed as a kind of circle, with houses prices moving from yields of (say) 4% to 11%

•Yields shifting down to 4% would represent danger.
•Yields rising to 11% would signal opportunity.


VALUATION TOOL 2: RELATIVE PRICES

People tend to actively look for cheaper and better alternatives. Where houses are very highly priced, people will seek more affordable alternatives. So if you’re buying property that’s amazingly expensive on a sqaure foot basis compared to its surrounding developments – BEWARE!


VALUATION TOOL 3: AFFORDABILITY

If house prices are so high that few people can actually afford to buy them, then their value will likely fall in future. A reasonable measure of value is a country’s GDP per capita. In a country where the ratio of house prices to GDP/capita is high, it’s a fair bet that houses are overvalued.

Relative to GDP/Capita levels:
•House prices in Luxembourg, Belgium, Norway, Denmark and Austria seem cheap.
•House prices in the UK, Italy, France and the Netherlands seem comparatively expensive.


VALUATION TOOL 4: PRICE OF NEW BUILDS

If house prices are much higher than the cost of building (construction costs), developers are motivated to put up buildings. So when you see a rush by developers to build, that’s a danger sign. As new supply comes into the housing market, that tends to put pressure on prices. So when house prices are far greater than new-build costs, it's a very clear signal that prices are likely to come down.

What u mean? i dont understand

Everybody in Norway a theoretical millionaire from 8 January

Can any oil producing country in the world make all her citizens millionaires via prudent management and savings? Norway achieved that on Jan 8 2014, 45 years after striking oil in the North Sea in 1969. But it only set up its oil sovereign wealth fund (SWF) in 1990, meaning it took the Norwegians only 24 years to be millionaires. The fund is called the Government Pension Fund Global.

According to a Reuters report, everyone in Norway became a theoretical crown millionaire on Jan 8 in a milestone for the world’s biggest sovereign wealth fund that has ballooned thanks to high oil and gas prices. The fund owns one per cent of the world’s stocks, bonds and real estate from London to Boston, making the Nordic nation an exception when others are struggling under a mountain of debts.

A preliminary counter on the website of the central bank, which manages the fund, rose to 5.11 trillion kroner (US$828.66 billion or RM2.7 trillion), fractionally more than a million times Norway’s most recent official population estimate of 5,096,300. It was the first time it reached the equivalent of a million crowns each, central bank spokesman Thomas Sevang said.

Not that Norwegians will be able to access or spend the money, squirreled away for a rainy day for them and future generations. Norway has resisted the temptation to splurge all the windfall since its oil strike. But what it does it ensure that the citizens of Norway will never experience an economic slowdown if the fund is managed well.

Finance Minister Siv Jensen told Reuters the fund had helped iron out big, unpredictable swings in oil and gas prices. Norway is the world's number seven oil exporter.

“Many countries have found that temporary large revenues from natural resource exploitation produce relatively short-lived booms that are followed by difficult adjustments,” she said in an email.

The fund, equivalent to 183 per cent of 2013 GDP, is expected to peak at 220 per cent around 2030 which ensures good times ahead for citizens of Norway.

“The fund is a success in the sense that Norwegian Government has managed to put aside money for the future. There are many examples of countries that have failed to manage that,” said Oeystein Doerum, chief economist at DNB Markets.

In Malaysia, only the Prime Minister has access to national oil producer Petronas’ funds and accounts not Parliament which ensures that oil returns from Petronas can be spent by the PM without having to get Parliament approval.

Malaysia is the 27th largest oil producer in the world, rolling out 693,700 barrels/day. Only 114 countries were listed as at 2009 and 2010.

Norway rolls out 2,350,000 bbl/day or 4 times more than Malaysia but what’s the financial position of Malaysia? A federal debt of up to RM700 billion! (as revealed by then Deputy International Trade and Industry Minister Datuk Seri Mukhriz Mahathir at end of 2012).

The Prime Minister’s Department also revealed that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013. Standard & Poor also revealed in its report that Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

And what has Malaysia done with its oil money? Has the Malaysian Government set up a special fund to guarantee the future of Malaysia? Yes it has. According to a written reply in Parliament by Prime Minister Datuk Seri Najib Razak, Petronas had contributed RM3 billion to the National Trust Fund (or Kwan, the acronym for Kumpulan Wang Amanah Negara which was set up in 1990) as at June 2011. He also said the money had been invested in various financial instruments and that Kwan’s fund currently stood at RM5.43 billion.

If Norway has a fund size of RM 2.7 trillion with its 4X more oil production, then a simple calculation should put Malaysia’s fund at RM 675 billion and yet we only have RM 5.43 billion?

Where have the remaining funds disappeared? Mind you this fund we are referring to here is solely for the purpose of safeguarding the future of Malaysians not to be used for general over-spending on a day to day basis. That money should come from other revenues. But in Malaysia’s case, its oil money has been siphoned off into ludicrous projects and over spending rife with corruption thus leaving very little for the rakyat.

The Malaysian PM said Kwan was set up to ensure that revenue from dwindling natural resources would benefit future generations. How is RM 5.43 billion going to ensure the future of Malaysians when our Government debt has reached astronomical levels of RM 700 billion?

Now, let’s take a more detailed look at how other oil producing countries are managing their oil revenue:

Kuwait (10th at 2,494,000 bbl/day), Libya (17th at 1,790,000 bbl/day), Kazakhstan (18th at 1,540,000 bbl/day), Algeria (15th at 2,125,000 bbl/day), South Korea (64th at 48,180 bbl/day) and Singapore (82nd at 10,910 bbl/day).

Malaysia’s non-commodity Khazanah Nasional, founded in 1993, is ranked 23rd with only US$34 billion in assets

The world’s largest, Norway’s Pension Fund Global, was in 2009 registered with assets worth US$664.3 billion

UAE-Abu Dhabi’s oil-based Abu Dhabi Investment Authority, established in 1976, is ranked second with US$627 billion

At third spot, China’s non-commodity SAFE Investment Company, which was founded in 1997, now manages assets worth US$567.9 billion

Singapore’s 2 investment arms, Investment Corporation & Temasek Holdins established in 1981 & 1974 respectively have combined assets worth US$405 billion despite not having much natural resources.

Even countries like Kuwait, which was severely damaged by Iraq’s bombing and brief occupation, Libya, Kazakhstan, Algeria and South Korea, which were far poorer than Malaysia in the 80s, are all managing their country’s wealth better than Malaysia.

Isnt Malaysia’s economic and financial standing truly shocking? In light of this, can we be sure that the property market can continue to sustain itself in future or are we heading for a collapse the likes of Greece?

Just a thought!

This post has been edited by cybermaster98: Jan 16 2014, 09:41 AM

Isnt Norway's debt at 28.80% of GDP at in 2012?