good commentary by playbook from an economics standpoint. should silence all those who insist that house prices will go up because of the increase in prices of building materials.

Playbook, generally we r all anticipating a drop, the big question here are :

1. Drop by how many %?

2. Even if the price drops say by about 10%, is it worth the wait?

I second Playbook's reply. Not all property prices will increase over time. Those old enough to remember the 1998 crisis will also remember a lot of bitter foreclosures when house owners couldn't keep up with increasing mortgage payments due to rising interest rates as BLR became more astronomical. Foreclosed properties were auctioned, resulting in lower house prices.

Witness the depressed house prices in Bkt Beruntung, Bukit Sentosa etc etc etc.
As always, the main three rules for house buying is location, location & location! Choice of developer is also crucial (if buying new developments)

Also, when opportunity arises, grab it quick. When the crunch comes, cash is king!
Some choice properties might soon be going lower than current market prices if a recession takes hold worldwide..

This post has been edited by fazlang: Jul 18 2008, 04:58 PM

Actually I'm working in Shah Alam. So Setia Alam to my office is actually nearer than I travel from PJ currently. I have colleagues that live in Bandar Puteri, Klang etc but the toll and time they spent are worse.

Read through some of the financial analysis.
We going to have a crisis soon. Now only midway.
Informed by a banker friend interest rate will go up by stages and it starts now.

with the recent hike in material cost, its unlikely that the property price is going to decreasing trend..maybe remain stagnant..

reasons:

(i) stiff margin doesnt allow much for developer to lower down their prices despite lower demand. Furthermore, there too many case where the developer experience cost overruns, cutting price lower would not be the best option to them..

(ii) if the price is lower, pls be extra coutious as the developer might cutting cost at the expense of quality..buying property from the reputable developer may mitigate this risk..but pricey la..

(iii) In prime area, property price is unlikely to be lower, in fact, the developer is trying to hold the their launches to enjoy hike in property prices..landed properties mahh..future value..

(iv) for small and medium size type of developer, too risky to buy from them especially during recession..they dont have back up cash to finance the construction..fully dependant on the disbursement from the buyer's financier..if they are facing cost overruns, they might just leave the construction site and winding up the company and ceased.. who will badly suffering?..BUYER>>>

p/s: this apply to new property under construction only..

ermm rate will be increase??

erm i heard that recently i also don't know when it will be happen..because i working in a bank mortgage line, it is advisable to refinance ur property if only our loan is ABOVE 5 years time because the current rate is the best rate that bank can give u by looking at 10 years record.

about the developer will increase the house price, it is true..some of the developer already increase the price and some of them canceling the project due to this current crisis,seriously can u imagine that u have paid everything, loan has been approve by banks, the loan agreement is executed, suddenly the developer canceling the project..

pity them but this is the true story that happen to my previous customer..then to me, the bank claw back my commission..isk isk

life is not fair, i guess

so keep on investing on property,the price will sustain or will be higher and at the same time u will continue to support people like me..hehe thanks

Thank you for the kind comment. Guess my 3 degrees specialising in Economics didn't go to waste after all haha.

The best answer to this question is to look with our eyes, what is the actual situation now.
Look at those prime areas for mid range properties (200-400K).
Everytime they are launched, booking will be at least 90% full.

So this is the real situation, mid range properties are still going to thrive currently, but for high end ones, be careful.

I will answer each in turn.

Firstly, you want to know what the prices will drop by? If I/we had a crystal ball on this, we'd be rich

But if you are really interested to know, you can find out broad price drops, based on *your* projected economic recession.

For example, you can run a regression on property price changes against economic growth (with additional lagged variables of 1/2 years).

However, please bear in mind: Property prices vary depending on location. As a management consultant, I did this study once on the average room rates in hotels distributed across the Klang Valley. There was less sensitivity to economic issues for 4-star and 5-star hotels closer to the Golden Triangle - this is intuitive of course, but was backed up by the econometric analysis.

If you are looking to buy into an asset, and you want to minimise a drop, you will need to just make sure you are buying into areas with resilient underlying demand. Again, it seems obvious, but sometimes people are so scared, they think that price drops are even across the board (it's not).

Please also bear in mind: Property prices will drop more where there's been a lot of property financed by loans. Again, may seem obvious, but if you happen to come across a property development, situated outside the klang valley area, heavily financed by a lot of different banks, with a middle-income consumer group, I would be willing to bet that prices in that property development will drop a lot more than in a property development in the klang valley area, catering for a high-to-upper-income consumer group, where buyers opted for less financing (paying more in cash). Seems logical, as the latter group would be under less pressure than the former group.

Secondly, this is a very interesting question! The answer lies in opportunity costs.

Ok, basically you have 3 decisions/options. Assume you think that prices will drop by 10% in 1 years time.

Option 1: You buy the property now, knowing that it will drop by 10% in 1 year's time, perhaps stable in the future before rebounding.

Option 2: You invest your money into an asset which generates wealth, earning a return of X%, before investing in the property asset in 1 year's time. Note: You can modify this option - do you need to stay in the house or rent elsewhere? In which case you deduct your rental expenses from the X% return.

Option 3: You have no productive investments you can make, thus earning a 0% return, before investing in the said property asset in 1 year's time. Note: as per above, if you need to stay in the house and would have to rent elsewhere if you don't buy it, then do deduct your rental expenses.

From above, that guides you as to your decision as to whether or not to buy the house now (even in the face of an expected 10% price drop). If you can definitely put your funds to better work elsewhere, it's better to hold off than buy an asset that will drop by 10%.

---

Added on July 27, 2008, 8:58 amah, yes, fazlang's comment is important. economic analysis can tell you what the broad price drops are in a nation, but it's location of the asset that matters.


This post has been edited by Playbook: Jul 27 2008, 08:58 AM

Interest rates should go up. (Which would depress house prices)

BUT WE HAVE AN INCOMPETENT GOVERNMENT.

So our genius of a government has chosen to keep economic growth humming at the expense of higher inflation.

Thus, there was no increase in BLR recently, though there should have been.

Thus, you will see some more cost-push inflation.

Eventually, they will have to cool off inflation. Even if we have to vote in a new government.

No offence, but this statement is too broad.

As an economist, i'd be willing to hazard a guess that if the mid-range properties are being bought with property loans, they would be more exposed to an economic downturn.

The high-end properties may not be sell, but if they are backed by an asset-rich developer who doesn't need to offload them, the prices may not drop.

If you have people who are willing to borrow to buy cheap assets, you can bet these guys are going to be hit by their leveraged status when the economy turns.

Around the corner from where I live is Tan Sri Vincent Tan's home and his other neighbourhood mates, with houses in the RM10-20 million range. I strongly doubt their prices are going to drop, even though the whole development is probably only half-sold.

In other words, we're going to have a sub-prime crisis ? people who don't have money take cheap loans to buy cheap houses they nevertheless can't afford, and then when the recession hits, they'll be the first ones to be laid off. And then we'll have bad loans and depressed property prices in the low end of the spectrum.

I think we're all agreed here, if you're going to buy property, mid-high to high end (good location) is where you should invest in. Another thing is how long do you want to wait ? we have limited lifespans, if we wait too long we might not live to enjoy the fruits of our efforts.

Well, if these speculations that a great economic crisis is on the way coupled with people unable to meet their loan payments are true then some people may want to simply wait for lelong from banks.

However, as mentioned above, it will not be the high-middle to high end properties that will be lelong'd. The individuals who purchase those have holding power and are not in a rush to sell out thus the prices for those are unlikely to fluctuate too much, especially landed properties.

As for waiting to cash in on ones property and enjoying the fruits of one's labour, I believe property is an investment that should only be long term (10-25 years) although for those who are impatient - mid term investment at least (5-15 years). If the property is good, some may simply collect passive income from rental or if the price is very good, sell it for $$$, invest $$$ and spend the interest collected from FD or dividends.

*shrugs* Different people have different goals and attitudes thus how they deal with their investements will be different.

I must point out, cruel though it may seem, that those who bought properties without considering how they would manage in times of economic downturn and crisis deserve it. I truly mean those who were ignorant or had rose-tinted glasses on. Those who had personal crisis (death of a relative, illness which caused a large unexpected expense(s), etc) are excused.

It is a historical fact that every economy will face problems and if they did not prepare themselves by having extra cash flow, savings, investments then there is no one to blame but themselves. Interest rates never promised to stay in place (unless you have a fixed interest rate) and banks are not your friends. It saddens me to know so many people stretch themselves to the limit that if one thing was to fall out of place, they will sink and drown.

Honestly, if properties are an investment you cannot see yourself handling for longterm, or at least mid term, then just rent. There are plenty of fair landlords whom rent out their properties and not cause trouble so long as you care for the place properly and pay rent on time.

Very interesting thought here. I usually dont give a damn about suburbs properties as I think these properties usually r long term gains. But I do agree that your idea above sounds logic and this could represent a buying opportunity should our economy goes south.

Bottom line, the drop is highly dependent on :

1. Location of the said property - Central KL should be more resilient than suburbs like B.Jelutong,

2. Property owners demograhic - High-end VS Mid-end and own stayers VS investors/speculators

3. Most important - Demand VS Supply



Agreee with the opportunity cost approach but the flaw here is that we make decisions based on asumptions. IMHO, the safest way is to seek undervalued deals for properties with strong fundamentals.

It actually depends on which property u bought. There are some very demanded properties that are not much affected even if the recession comes.

As for how to look the demand of the properties, very simple, look how many houses within a new garden are actually fully occupied.

Over the pass 1-2yrs, I saw a lot of Empty high end properties, these owners are actually investors, when recession comes their business get hit or cannot sustain they will sell off all their invested properties, thus flood the market. Supply increase = price dropping.

I would be very interested on how these actually play on. Been holding off my family & my cash to grab any durian.

Well, if they are well prepared for recession then they will still most likely hold onto the properties if they are able. If they had enough income or savings stashed to weather 1-2 years of economic instability then may not be too many durian runtuhs.

It is all very uncertain now how bad those holding high end properties may be hit. We can only be certain those who aren't prepared will be badly hit as they stretched themselves too far with no nest egg to see them through bad times.

Wait and see is probably what alot of people are going to do for now.

However, if you can buy an undervalued property in a good location then it may not be advisable to wait... I think money is better protected in property than in the bank right now as inflation hits.

Your dollars and cents be worth less and less compared with properties that is more likely to protect ones $$$ value. Unless of course FD goes all the way up to 10% then naturally FD will be very tempting XD

But of course billytong is right, basic economics cant be ignored - if more supply than demand, price decreases. If supply is less than demand then naturally price increase. Note that that is why many investors try to snap up properties close if not within the city as land and development there will eventually exhaust itself and more people come to live and work there. I doubt that it will be in the next 5 years though... Thats why property must be seen as a long term investment to truly reap the rewards.

Long term in the sense of what ROI.

If it takes a property raise its value 50% in 10yrs, then it is not a good property.

I usually like to look for those that I can get 15-30% ROI within 3yrs.

hi, i have a question regard re-financing house loan, here my condition:

Current Principal Balance : 90K
Current Mortgage % rate : 4% (company loan)

With current bank interest rate at ~4.25 percent should i consider refinancing, as i try the refinancing calculator at http://www.ykconsultancy.com/refinance.htm, it say good to do it..?

Pls help to advice.

Thx