Property bubble close to bursting due to 3 reasons. Government must be ready!

Edited as at 5pm on 25th July 2018. (Added in the IDEAS paper for download at the end of the article) As well as additional comments after reading the paper.
Just a few days ago, I was telling the crowd about the three signs to look out for when it comes to property bubble bursting; continuous property price increase, total unaffordability of all properties and Non-Performing Loans. There’s now a prediction that the property bubble is about to burst and that the government should allow it to happen but be prepared to remedy it to ensure the economy is not badly affected. As per article in FreeMalaysiaToday (click to read full article)  The idea that Malaysia’s property market may be bursting soon comes from The Institute for Democracy and Economic Affairs (IDEAS). IDEAS senior fellow Carmelo Ferlito says that the property bubble which has been building up over the past few years will burst soon and this is due to three main push; spectacular growth of the high-end property segment was ignited by rising profit expectations, growing demand and a supportive credit market. These three elements had generated a bubble which, following the property transaction dynamics, reached its peak between 2012 and 2013.
There has been more reports over the past few years highlighting the glut in supply of office space and high-end residential establishments in certain parts of the country, particularly the Klang Valley. At the same time however, people wants affordable housing. Ferlito presented a n IDEAS policy paper titled “Affordable Housing and Cyclical Fluctuations: The Malaysian Property Market” in which he explored the problem behind the local property market and provided some policy suggestions. He shared, “The focus on the high-end segment was justified by high demand, and it is therefore natural that investment expanded in that sector. However, now that it appears clear that unexploited profit opportunities are disappearing, a capital allocation restructuring appears necessary. The high involvement of government agencies in the affordable housing market risks crowding out private initiatives and preventing the necessary restructuring from taking place.”
He said the government should let the bubble burst instead of keeping prices artificially high, putting at risk the financial solvency of buyers. His suggestion? “Without credit support, the crisis will happen faster and force both capital restructuring and prices to move downwards.” Recommendations to the government is to respond with market-oriented solutions and pay special attention to household financial exposure. In terms of affordable housing market, it has suggested that the downplay its role in the property market and instead encourage the private sector to get involved in the affordable housing market. Besides that, it says that the government should also enhance financial literacy, especially encouraging people to save and rent instead of buying properties. Besides that, the government should also ease regulations to allow foreigners in possession of a regular working visa and who paid taxes “to help the industry in a crucial moment of difficulty”. Full article in FreeMalaysiaToday. 

I would love to read the full paper by IDEAS and understand what’s his (Ferlito) take on the current mushrooming of affordable homes in the country. Also the new government’s policy to complete 1 million new affordable homes within 10 years. In terms of high-end property segment, perhaps it’s best that we talk with the price range because even an affordable apartment at RM400,000 could be a luxury property to many M40 and B40 Malaysians. As for property bubble bursting and the government preparing for it, perhaps just leave it to BNM and the government to handle it when the bubble bursts. By the way, when the property bubble bursts, it will not impact just the luxury home owners yeah. It will affect the whole market’s sentiment and when everyone spends lesser, the businesses would start shrinking too. This will affect the job market which will cause the property market to be even more critical. Hopefully, our BNM and government have a copy of IDEAS paper. Happy following.
This is the paper from IDEAS for download (click here).  Let’s understand that Ferlito is not predicting the typical property bubble type of crisis. He shared, “Market observers are still reluctant to talk of a crisis, but a crisis does not necessarily take the shape of negative percentage changes. A slowdown is already the emergence of a crisis, which is more appropriately labelled as a ‘readjustment process’.” (In other words, Ferlito himself is also saying that the ‘crisis’ that he is talking about is more of a readjustment process).  He also added, “It is also not surprising that with the increased amount of investment in a peculiar segment of the market we observe a growing number of unsuccessful initiatives (i.e. unsold units): new products enter the market too quickly to be absorbed smoothly. As soon as entrepreneurial impetus loses steam, and credit policy tightens, the system embarks on a struggle towards a new equilibrium, and such a struggle is what we call ‘crisis’.” (Please be reminded that just the mere increase in unsold units will not crash the property market. We need to know the reasons for these unsold units which if it is not solely due to super high prices, then the possibility of a crisis is much lower. Let us understand that the buyers still have access to the secondary market as well as new supply of affordable homes and does not need to ONLY be confined to these unsold units) 
written on 24 July 2018
Next suggested article:The potential property bubble bursting in Malaysia,signs to look out for



    1. avatar

      Thank you Bob. I have just read it and added my comments. Say hi to Ferlito for me. Cheers.

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