This is a continuation from V5:
https://forum.lowyat.net/topic/3182390

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 of 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.

This post has been edited by icemanfx: May 3 2014, 04:25 PM

Abstract from BIS conclusion;

Meanwhile for household debt, our best guess is that there is a threshold at something like 85% of GDP, but the estimate of the impact is
extremely imprecise.

As with government debt, we have known for some time that when the private sector
becomes highly indebted, the real economy can suffer. But, what should we do about it?
Current efforts focus on raising the cost of credit and making funding less readily available to
would-be borrowers. Maybe we should go further, reducing both direct government subsidies
and the preferential treatment debt receives. In the end, the only way out is to increase
saving.

Many people forgot real estate investment is highly geared.

More likely Mr A;
1) Bought 500k property with 50k downpayment. If property dropped to 400k, Mr A is underwater by 50k.
2) With 50k cash could only buy 50k shares, if dropped to 25K, still left with 25k.

If interest rate raised by 3%;
1) Mr A may not able to service 450k loan repayment, visited by repoman, loss all and more.
2) 50k share may become 45k but could place downpayment to buy previously 500k property for 400k or less.

In loan agreement, bank has the rights to recall the loan or ask borrower to increase collateral anytime without giving any reason. In 1997, banks did recalled loan (from those in npl) and told borrowers to increase collateral (from those in doubtful), and any reason why it won't happen again?

This post has been edited by icemanfx: May 4 2014, 05:10 AM

Looks like syndicate is in play, while flippers are asking/holding for 560k/580k, syndicate is off loading at 490k.

This post has been edited by icemanfx: May 5 2014, 03:41 AM

If transacted, valued by bank at 500k and can borrow up to 80% i.e. 400k. Those who are asking for 560k, need to find buyer to accept +/-560k and have 160k cash. If syndicate have a large number of units to offload, these 560k vendors could be in for a long haul and some may not be able to sustain.

Before property market crashed in the U.S, Spain, Dubai, China, etc, similar statements was made by people with vested interest.

Only if bnm economists are smarter and better than fed.

Sure, Zeti will become the next world bank and imf president/managing director.

I am still a student, learning from taipan here.


This post has been edited by icemanfx: May 5 2014, 04:58 PM

Steel sector faces glut, profit margins to be squeezed further

PETALING JAYA: Local steel millers’ profit margins, already under pressure for the past three years, are expected to shrink further, as the global steel sector faces growth in manufacturing capacity at a time when consumption growth is slowing down.

Datuk Soh Thian Lai (pic), the president of the Malaysia Iron and Steel Industry Federation, said that the “excess capacity” could be the single biggest problem facing the industry, noting that the global steel output is expected to increase by 3%, or about 1.65 million tonnes, this year. Most of this new supply is coming from steel mills in China, Soh said.

“This is on the back of 250 million tonnes of existing capacity available in the world, which has not been easily utilised, as the global demand has not grown in tandem with the supply,” he pointed out.

Added Soh: “Our steel millers are currently grappling with surplus supply and the influx of cheap imports, mainly from China, coupled with the domestic industry’s capacity utilisation being very low at the moment. Some millers have incurred losses, while some still have marginal profits.

http://www.thestar.com.my/Business/Busines...xcess-capacity/

While some claimed raw materials price increase in May.

While sub $300 psf condo is still available, why first time buyers need to burden with $500+ psf?

http://www.propwall.my/selayang/magna_ville

Guess you are LKS in the making. Can share your strategy with us?

How was the repo this morning? Any incident or story to share?

Only property in 3rd and 4th tier cities are in trouble. Those 1st and 2nd tier cities investors have no where to invest but kv and iskandar.

Property game has been in existence long before gen y is conceived. If property game is that simple, there should be many more LKS on the street.

This post has been edited by icemanfx: May 16 2014, 01:20 PM

Sub prime crisis in the u.s and subsequent qe, euro crisis brought low interest rate regime and flood of money to the market which explain why assets price is inflated. Hence, qe tapering and interest rate rise will have impact on inflated property market.

You will be surprised how many hedge funds are advised by academicians. Some professors in the U.S are worth over $100m.

Except those who bought to stay, how many flippers still hold properties bought in 2009?

The issue is not with economists but politicians. How many politicians are willing to pop the bubble or listened to economists?

How many units you have?

You can pm me when you decide to offload at rm150 psf.

During bull run, price could be irrationally high. Likewise during bear run.

Rm150 psf is still above construction cost.