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Impact of the Cooling Measures on the Primary Market

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The real estate industry in Malaysia is a major contributor to the economy. It supports a host of ancillary services, trades and businesses including behemoths like the Construction and Financial industries. Factor in Malaysians’ strong preference for homeownership plus a general view of property being a good hedge against inflation, and you will find a natural inclination towards purchasing properties.

This appeal of owning properties coupled with high liquidity in the financial markets led towards property price growth that began to raise flags. Some quarters were concerned that the average homeowner was being priced out of the market due to heavy buying by investors, including foreigners. To ensure house prices remained affordable and not subject to artificial upward pressures, our Government introduced measures in 2013 to discourage overly speculative elements.

Shortly prior to this, the Government also enforced new guidelines for housing loan applications to be based on net income debt servicing ratios instead of the prevailing practice of gross income. This resulted in a more stringent lending environment which saw many failing to obtain the financing support they had expected. In short,
• it is harder to borrow for property purchases
• more capital outlay is required
• there is more transparency in sales promotional packages

The cooling measures are meant to provide stability into the market, to avoid property bubbles that could harm the economy. Similar, if not more severe, steps were also introduced into regional property hotspots like Hong Kong, Singapore and Shanghai. While it has taken longer with multiple rounds of cooling measures to curb the rapid rise in property prices in those economies, the impact of the 2013 measures in Malaysia has been sharp.

1. Lower Transactions but Higher Prices
Data from the National Property Information Centre (NAPIC) shows that number of primary market transactions dropped by 31.6% in 2013. This is corroborated by the reduction in sales targets by several large property developers. Surprisingly, however, prices continued to climb, achieving growth of 20-30% on average (RM 15.95 bil for 60,241 transactions in 2012; RM 13.92 bil for 41,190 transactions in 2013). While some may argue that these figures are inconclusive, anecdotal evidence gathered from property launches seem to support this with prices per square foot continuing its rising trend.

2. Smaller units
Facing lower transactions, supply has shifted towards smaller sized units to ensure more affordable absolute prices. The era of generously sized units is declining with new launches featuring compact designs to accommodate up to three bedrooms within an average of 800-900 sq. ft.

3. Slower sales rates
The cooling measures dampened market sentiment, resulting in slower take-up rates across most new launches. Developers are taking longer to move stock compared to the boom days of yesteryears.

4. More creativity
Developers have taken the softer market environment into their stride and responded by offering newer design concepts that create value. One good example is the Dual-Key layout design which enables two separate parties to occupy a unit independently without need for any interaction. This allows much more flexibility in the usage of the unit and opens up more opportunities for the eventual tenant.

5. Better quality buyers
The tighter lending environment has rooted out prospective buyers without the necessary wherewithal to purchase property. Instead, better quality buyers with stronger financial positions have surfaced as a result. The risk of defaulting from this category of buyers is much lower which augurs well for the health of the industry as a whole.

By and large, the objective of these cooling measures has been successfully met albeit at the cost of a slowing property market. Inevitably, in attempting to safeguard genuine housebuyers, the dampening effect is felt industry wide and has diverted buying interest away. However, in a recent report, CIMB Research stated that the impact of the measures (though negative in the short term) should be positive over the longer run because they should help to remove froth from some segments of the market. Further, property launches in good locations and priced well have continued to receive overwhelming support.

Moving forward, most analysts and industry practitioners are bracing for a difficult 2015 due to concerns such as the impending Goods and Services Tax (GST), higher construction costs, rising cost of living and uncertain global economic atmosphere. Nevertheless, CIMB Research expects buying interest to gain momentum in 2015 once buyers recognise and accept that prices are unlikely to fall. In any event, the Malaysian primary property market is highly resilient and will continue to grow to meet the needs of our nation.

Article is written by Eric Lim, Founder and Managing Director of Hartamas Real Estate Sdn Bhd, MIEA’s Real Estate Agency of the Year 2012 to 2014 and Commercial Real Estate Agency of the Year 2011 to 2014. Log on to www.hartamas.com for more information. The article represents his personal views.