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Impact of the Ringgit’s Slump on Property Prices within the Malaysian Real Estate Marketplace

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As the value of the ringgit slides further, are we able to afford a home?

 

With Malaysia’s economy heavy dependence upon oil export, the recent plunge in exchange rate was a stark reflection of the collapse in crude oil prices. The depreciating ringgit is deemed a ‘silver lining’ or a blessing in disguise for the Malaysian property industry, as local real estate would be priced more competitively against global markets. A weaker ringgit will not directly affect developers’ costs, as long as they did not use imported goods. Chances are people will come to Malaysia to buy properties, because it will become cheaper. The ringgit’s weakness came against a spectre of slower economic growth, as income registered record-high deficits.

 

Developments such as an emerging middle class society, low oil prices, and the impact of the goods & services tax (GST) are likely to have intriguing effects on the property market. Investors should thus prepare to exploit such developments, which could overturn their investments in their favour. The depreciation of our local currency would cause most local residential and commercial properties to be more affordable than usual or normal to many foreign investors. Given the importance of attracting international talent as well as foreign direct investment (FDI) into Malaysia to spark and spur economic growth, investment-friendly measures should be introduced to attract such resources into the country. The downturn of the Malaysian ringgit and the implementation of GST may be a justifiable cause for concern, as they are widely expected to result in inflationary pressures. However, lower oil prices may have the benefit of lowering the general cost of transportation, which would filter down to logistics, utilities, commodities, and raw materials; all of which should lead to a lower cost of construction.

 

The property market has either gone flat or is showing gradual signs of decline, as indicated by rentals and capital values for prime areas. Local markets, especially the high-end segment, appears to be feeling the pinch of over-supply and the tightening measures on investment. Rental rates for commercial property were on a downward trend last year dropping from RM6 psf (per square foot) in the second quarter to RM5.97 in the fourth quarter. Office occupancy rates also fell from 87.9 per cent in the second quarter to 86.4 per cent in the fourth quarter. The commercial property sector is expected to remain soft in the next couple of years as it will take time to increase demand with new initiatives while there is a substantial amount of new supply, most of which is of a speculative nature. Meanwhile, the average capital value of prime condos declined slightly from RM600 psf in the third quarter to RM599 during the fourth quad.

 

Bank Negara had also mandated a 70 per cent cap on the ‘loan-to-value’ ratio (LVR) for the purchase of a third residential property, down from 80-90 per cent and this could drastically affect the high-end property market in the immediate future. It will probably have a substantial negative impact on the high-end or luxury segment whereby buying has been largely targeted or focused. Affordable properties within the price range of RM300,000 to RM400,000 would not likely be affected by the capitalisation exercise itself. The LVR cap also does not affect first-time and new home-buyers. Government is certainly working to hard curb speculation in the higher end segment of the market and such luxury properties might eventually witness an inevitable or eventual slowdown. The value of properties there are stable although rental rates may have been hit by a glut or over-supply of units. The supply of condominiums have gone up so, rental wise, the market is more competitive, although there could be a slight dip in property prices due to Bank Negara’s 70% LVR to curb excessive or unscrupulous property speculation.

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Demand from first-time home owners have always been consistent and developers should pay heed to build more affordable units to exploit or capitalise on market demands. The property market itself could also be affected by expectations that Bank Negara would raise the statutory reserve requirement for banks which could halt or paralyse loans development. Residential loan approval contracted 3.8 per cent year-on-year in December last year whilst non-residential loan approval slowed to 30.2 per cent from 47.3 per cent in Nov 2014. Over the last couple of years especially, property market prices have skyrocketed as investors, speculators and short-sellers took advantage of the weak ringgit and market volatility. Prices have almost doubled in certain locations. In some countries, the real estate bubble has long since burst. For how long more can we see property prices going through the roof in Malaysia? Landed homes, condo units, as well as apartment suites are being priced out-of-reach of most middle-class Malaysian citizens.

 

 

Despite the sliding ringgit and rising property prices, interest in overseas properties among Malaysians continues. Special destinations of interest include Singapore among others. The interest to buy abroad is unlikely to affect the Malaysian economy negatively as collectively, the amount in question is not sufficient enough to pose a strain or stress on the national economy as compared to other sentimental and sensational issues. Investors from all the various races would want a strong currency to house their capital pool money, as well as niche investments with capital gains or appreciation in mind. For typical investors, properties offer a strong hedge against economic inflation. Some are also organising and regrouping their investment baskets with greater emphasis on overseas properties which could provide an income stream or revenue compared with forex investments alone. They want diversification and higher returns, henceforth, recovery will be faster, which gives investors peace of mind. Because of the steady rise in property values, it has given investors some degree of comfort but there are still certain unforeseen risk. One possible financial risk is the potential effect of ‘over-valuation’ in property.

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In the case of Malaysia, the people are affected by the sharp fall in oil price, the goods and services tax (GST), inflation which had led to currency depreciation and other negative news. Is it all purely market sentiment at work or a fundamental loss of investor’s confidence from the public’s eye – whether it is a matter of perspective or merely perception? In the long-run, investors will surely view this as a kind of prospect to buy Malaysian assets and properties. There are abundant or bountiful opportunities for Malaysians to put their money into foreign currency accounts which will help to stem ‘capital flight’ or even impede foreign investors from coming into the country to “splash their cash”. Furthermore, Malaysia is going through some tough economic times and politically-volatile market uncertainties which will have some bearings as well as consequences on investment climate or atmosphere in the future. The following are several pertinent questions with regard to the general property health in the local real estate market in terms of the dramatic slump or downturn in the ringgit’s market value.

 

How will the current depreciation of the Malaysian currency affect property prices in the local real estate market? Will the ringgit’s slide dampen the sale of property, particularly in the housing and residential sector?                     

During the past 1 ½ to 2 years, the general market sentiment in Malaysia was rather bearish. Malaysians had been typically cautious with their spending. This fact became more apparent in the purchase of big ticket items such as real estate. With the recent depreciation of the ringgit, it had a compounding effect on the negative sentiment within the property market. Until such time when local market sentiment recovers (or become bullish again), sales and take-ups would remain slow, sluggish or even stagnating!

 

Since GST was implemented back in April 2015, local property markets have been registering mixed reviews with many quarters delivering dismal sales. Will the GST factor continue to remain a driving force in determining the outcome of property price with respect to the dwindling or falling ringgit?                      

Though the GST (Goods & Services Tax) had been discussed way before its eventual implementation in April 2015, many people were not mentally prepared for its impact. As a result many went through a shock phase as things in general had become more costly. As to whether the GST factor will continue to impact property prices, it is just a matter of time before it no longer is an issue; once Malaysians get used to being charged GST on their purchases. This had been the experience of countries which had implemented GST or VAT (Value-Added Tax). There was an initial inflationary effect to the economy where prices went up, followed by a contraction of the economy as people either held back their purchases or due to a reduction of purchasing power. After a period of time, as people began to accept the situation, purchasing power will return to the market (that is if wages keeps up with the inflationary impact of GST). Unfortunately, before we can recover from the “shock” impact of the GST implementation, we are being impacted by the downturn of the ringgit among other things.

 

Should house buyers and property owners be overly concerned with the impact of the ringgit’s drop in value on property price in Malaysia? What can the average citizen do to compensate for the hike in property prices?               

Property prices are largely governed by the cost of the construction of the property, including building materials. Therefore if we use a lot of imported building materials in the construction of the property, then obviously the falling ringgit would increase the overall cost. Steel is one such building material that is used extensively in the construction industry. Though steel may be imported, the prices of steel on the world market had fallen. As such the impact of the falling ringgit is minimal. The other main component is cement, which is a controlled-price item in Malaysia. Just like everything else, the price of property is largely dependent on the market forces, meaning the supply and demand. Where supply outstrips demand, then naturally price would need to come down and vice-versa. Based on recent data, the supply of residential units is more than the demand. And that is the reason why properties prices had been stable or had fallen. For home buyers and property investors, now is a great time to buy property. With so many great offers from developers, you only need to buy from a reputable developer. This is because by the time you get the keys to your new property, it would have been 2 years for landed property and 3 years for strata-titles development, from the moment of transaction or purchase. Surely the Malaysian economy would have turned for the better by then hopefully.

 

What can property developers do to minimise the damage resulting from the rising cost of construction & building material due to the ringgit’s slump? How do most developers compensate for this inevitable increase in price?                  

While it is important to look at construction cost, developers should also look at ways to increase their revenue. Not too long ago, developers had been launching niche projects that often appealed to the upper class or higher echelons of society, and many are still in possession of premium stocks of such exclusive development. These developers should get together and promote their respective luxury development overseas. For new or entry-level development, however, property developers should focus more on “bread and butter” properties.

 

How will the government alleviate the concerns of investors, home buyers and property owners with its business-friendly and people-centric policies?      

Property buyers are generally divided into two primary categories. There are those who are buying a property as their home, as well as property investors who are buying either to “flip” (i.e. meaning buy-then-sell) or for rental income. Henceforth, different policies would impact specific categories differently. However, there are several common causes for concern. Firstly, many property buyers are having issues securing a bank loan to finance the purchase of the property they want. Many have had their bank loan application rejected. What would be helpful at this juncture is for the Government, particularly Bank Negara to ease or relax some of the loan requirements and other financial restrictions so as Malaysians could start purchasing their own homes. Secondly, the Government should also lower or decrease the stamp duties for both the SPA (sales and purchase agreement) and housing loan agreement, especially for those who are buying a home for the first time. Thirdly, the Government should make full use of their land banks to ensure that each and every Malaysian has equal and ample opportunity to buy a home at an affordable price. PR1MA is one such initiative and as such it should be lauded; whereby homes are sold at an “affordable” price. Fourthly, the Government could introduce a ‘First Home Owner’ grant which in some countries like Australia has to do with promoting home ownership. This specific grant is where the Government would give a subsidy to assist first-time owners to purchase their new house, and to subsequently alleviate their financial burden. Finally, is a policy review of the RPGT (Real Property Gains Tax). If the RPGT is lowered then we could get more property investors to be active in the market again, which would stimulate and “hype up” market sentiment.

 

Will the secondary market, including business traders and entrepreneurs be adversely affected by an under-performing currency amid poor market sentiment caused by negative political sentiment and public perception?

The poor general market sentiment has had a negative impact on everything in Malaysia with the exception of those dealing in exports & imports trade. However it is also at times like this whereby certain opportunity actually presents itself. If we are able to take advantage of the current situation or circumstance, our net worth can grow exponentially when good times do return. While land and property prices may have stabilised, in other locations, they taken a downward spiral. Should we invest now, prices would surely increase when the market booms.

 

What are the key issues or core challenges for residential and commercial properties locally within an uncertain market caused by unstable currency?

I believe the fundamental or key issue here is market sentiment as well as perception. Once the market sentiment recovers, everything including the currency itself should stabilise. As such the Government must put in more effort to ensure that this happen. After all, market volatility in the property industry is quite commonplace, similarly with the burse or stock exchange market.

 

What role can housing and real estate associations such as HBA, REHDA, and FIABCI play in an increasingly competitive real estate market and property environment, specifically with regard to owning a home or investing in property? What are the future foreseeable impact to property investment & real estate development in the Malaysian property context?         

Housing associations, be it governmental or professional, do in fact play a major role in the current market situation. They could act upon various fronts to mitigate the current property buying situation. First and foremost, they must act to present their views to the Government in order to protect home buyers and to encourage property investing activities. Second of all, they could organise educational events for both house buyers and property investors alike. House Buyers Association (HBA), for instance, should continue in their effort to educate and guide the public on the various issues involved in owning a property. Activities such as public forums, seminars and even online information portals would definitely further their cause. REHDA had been doing a rather splendid job in bringing forth the supply & demand side of property together by regularly organising events such as MAPEX. Due to the depreciating ringgit, FIABCI Malaysia is also well positioned to bring in foreign property investors to Malaysia. After all Malaysian properties had become relatively inexpensive in terms of USD, GBP, SGD, etc. In the foreseeable future, it is extremely difficult to predict if the ringgit will still be at the present level. This is due to various internal & external uncertainties, as well as market volatility. However, as property investors and home buyers, it is times like these where it is relatively easy & cheap to find “good deals” or bargains. As a matter of fact, you could walk into any developer’s office and they would hand out all sorts of offers for you to commit & buy property.

 

Calvyn LaanAbout Calvyn Laang, our contributor

Calvyn Laang enjoys sharing his knowledge in creating passive income streams that will “feed” you for life. After working for 22 years in sales and marketing, Calvyn is now retired with passive income from property investment and internet marketing. In his quest to see a generation of people who can be financially free, Calvyn regularly holds workshops and seminars to share the mindset and the “how-to” achieve financial freedom, including property investing. Calvyn specialises in the area of Financial Freedom, Real Estate Investing and Internet Marketing. Calvyn had stopped working with passive incomes from Real Estate Investment and the Internet. He had always believed that one should build a few passive income streams in addition to the income that one receive from his or her employment.

 

Calvyn Laang is known for his willingness to share what he knows. Over the years he had personally mentored some of his clients to be successful real estate investors and internet marketers themselves. Real Estate he conducts regular real estate investment seminars to share his vision that real estate investing is not only for the rich but is also for everyone. He believes that real estate investing is the best investment vehicle for an average wage earner to retire earlier if he or she choose to. Calvyn Laang also has a personal portfolio of multiple investment property. His real estate investment portfolio provides a positive cashflow monthly.

 

Calvyn is a 3rd generation real estate investor. His grandmother is a typical rags to riches story. After losing her husband at a very young age with 4 young children (the youngest being less than a year old), she worked two jobs to feed the family and to invest in real estate. By the time she passed on, she had left behind a portfolio of several acres of land and several commercial and residential real estate that are steadily earning a monthly income. Calvyn’s own parents actually use real estate to finance their children’s education as well. Internet Marketing Calvyn had recently started making money from the internet. He believes that internet marketing is ideal for everyone because the start-up capital is almost minimal. Calvyn had also started coaching others to be as successful as he is in internet marketing. He conducts regular workshops to share this knowledge, especially the short-cuts to make money online.