Property overhang is not main reason for property price to drop

Property overhang is not main reason for property price to drop

I always tell people that if we start looking, we will find opportunities. If we stop looking, that’s when everything we say is just complaining. Property market starts to see more transactions and some friends say, property bubble is coming. Property market starts to have property overhang and some friends say, property price will soon be falling. No matter what happens in the Malaysian property market, there are always one group of people who will thrive as they jump into the market and find good investment opportunities and there is another group standing by the side and commenting on everything that’s happening. Today, we talk about overhang property.

Overhang property trend

The image below is showing actual overhang status right below. Property overhang was 25,455 units way back in 2006 before it went down every year until it was only 10,285 units in 2015. It has since gone up to highest point in 2018 which was 32,313 units but since 2019, 2020 has been on a very slow downtrend. However, the number remains extremely high. Some say, overhang should cause property prices to drop. Right?

With such a high number of overhang units, why is the price not coming down? Let us ask the owners, shall we? Property owners including me lah. I do want to sell one or two of my properties at the moment.

#1 question. If you bought at RM400,000 would you want to sell at RM300,000?

If I am the owner being asked this question, I do think the one who asked the question was just asking for fun. How many of us would want to sell something at a lower price if we bought it at higher price? With cars, we have to sell at a lower price because of depreciation but what about property? Just need to ask the earlier buyers of all the mature townships of today if they could sell you their properties at a price they bought long time ago when no one wanted to buy…

#2 question. If you do not really need the money, would you sell at a lower price?

If I do not really needed the money, I will not be willing to sell at a lower price. I will hold on for as long as possible. This is the reason why owners do not usually sell at a lower price because it would make them feel bad. No one wants to feel bad in any decision they do.

Of course, If it’s for emergency, then I would sell at any price… If this is happening, then it happens at ALL TIME, not just during the time when there’s property overhang yeah.

If I needed the money for renovation for my new home which will happen one year later, then I may sell when the price is right and as my renovation date nears, then I may sell at a lower price too. By the way, if I needed the money for renovation, the question of selling during overhang or no overhang is also not applicable. I just needed the money.

#3 question. If I am not under financial pressure and I still want to sell, then how?

If I do not have any financial pressure but I just want to sell because I just do not want to continue holding the property and prefers cash, then what would be the price I may sell? I will sell at … extra 1%. Haha. Okay, we assume the market price / transacted prices to be RM500,000 currently.

If I am selling that RM500,000 home, I will be willing to sell at RM505,000 (1% extra just to make me feel better) even if I spent RM100,000 for my renovation. The buyer to this RM505,000 property would be happy because he can buy a fully renovated home at just RM505,000 versus a market price of RM500,000 for a partially renovated one.

Unless of course the buyer was lucky and found a financially distressed seller. Else, my RM505,000 unit is a very good deal as he can easily save the renovation fee with just minor touch-ups. RM505,000 is still showing a 1% higher in property price when it comes to the statistics.

#4 question. Then what happens if there is a financial crisis?

During a financial crisis, we would suddenly have a big group of sellers who needs money. When we have a sudden huge supply, then the pressure will cause prices to drop and it’s usually fast too. So, when there is a financial crisis, property prices being transacted always show a downtrend. At that time, cash is king. Buyers are usually the ones with bargaining powers.

For example, during the 1998 ASEAN financial crisis, property prices in Malaysia dropped by double digits. if I remember correctly, it was 16%. Image below from ceicdata.com

We just need to be aware that usually, when financial crisis is over, property prices will start to rise again because now, the ones who could hold is more than the ones who are desperate. The desperate ones would have sold their properties earlier, during the financial crisis period. If they could hold on during the financial crisis period, they will now not be willing to sell lower since financial crisis is over.

#5 question. What’s the reason there’s an overhang in the first place?

If the new property development does not sell well for whatever reasons, it will soon become an overhang property. Overhang property are properties which have received Certificate of Completion and Compliance (CCC) but remained unsold for more than 9 months.

Now, the next question is, when it did not sell last year, can it sell well this year? If it is to sell well this year, then prices would have to be adjusted. How about 10% lower? No one has any interest if is just 10% lower for properties which people did not want previously.

How about 20% lower? Maybe a small number of potential buyers who think it’s already a good deal.

What about 30% lower or higher than 30%? Haha. If it’s 30% or higher, then we need to think about why they can actually discount 30% from the initial price in the first place… Unless of course the units are all the very old units, then still possible that the developer wants to have cash versus keeping the property.

Conclusion?

Overhang does not cause prices to drop. Overpriced property will cause prices to drop. Financial crisis will cause prices to drop. A badly designed property using sub-quality materials will soon cause prices to drop. In fact, even financially stressed sellers will cause property price to drop. We can see there are many reasons which will cause property prices to drop. Happy evaluating.

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