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Is there a Housing Bubble in Malaysia? 3 Ways to Spot One & How Can We Prepare For It.

Is there a Housing Bubble in Malaysia? 3 Ways to Spot One & How Can We Prepare For It.

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What is a Housing Bubble? No, it’s not blowing bubbles in or around your house but rather it’s a trend of unreasonable increase in the prices of house where the increase is supported by non-economic factors.

What is a Housing Bubble? No, it’s not blowing bubbles in or around your house but rather it’s a trend of unreasonable increase in the prices of house where the increase is supported by non-economic factors. The result? House prices then become intolerable in terms of affordability and the bursting of this bubble would lead to the crash of the property market. (Majid et. al, 2017)

Non-economic factors? To be more clear, its speculation and expectation. The prices of houses rise because players in the market, including buyers, anticipate that prices will rise further in the future, thus luring in more buyers, with thoughts that they will be compensated by the great increase in value in the future.

Now, can prices of houses rise forever? No, without a doubt, says a majority of economists. According to Professor Shiller, an Economics professor at Yale University, when people perceive that prices have stopped going up, past support for their acceptance of high housing prices will break down, and prices will fall due to diminished demands among buyers. (NPR, 2015)

Hence the question now would be – is there a housing bubble in the Malaysian property market? There are ways to spot one. Firstly, the availability of houses to buyers. According to the National Property Information Centre (NAPIC), the number of houses being built matches the growth of buyers in our country. However, the issue is its affordability. The number of unsold residential property has been rising since 2011, peaking in 2017 (NAPIC, 2018). A study by Chee (2017) in the Malaysian Journal of Economic Studies revealed that an affordability crisis and increasing price-to-income ratio are the precursor to a bubble burst.

The second tell-tale sign of a bubble present are rising interest rates. If interest rates are high, it restricts the purchase of residential properties as it would require more payments to be made during the loan period. Interest rates rise during a bubble as a reaction by banks to rising property prices. Low interest rates would create an over-expansion of the supply money which enables the purchase of costly houses, houses that buyers may not be able to pay over time, due to high prices. Thus, to restrict buyers from defaulting and to avert a bubble burst, rising interest rates one of the fiscal tools that the Bank Negara would employ. (The Balance, 2019)

Finally, another obvious sign that foreshadows an impending bubble and its subsequent burst is are historical pricing trends. Comparing past pricing trends to properties selling today would reveal if the market is in a bubble. However, property prices are expected to fall in 2019 in Malaysia, due to improving consumer sentiment and proactive government policies, though if this does not happen, then a bubble is likely is in motion.

What can Malaysians do amidst a housing bubble? Chief Economist of the European Federation of Building Societies, Emile J. Brinkmann, has a few strategies that buyers can adopt to hedge against a housing bubble anywhere. (EFBS, 2018)

Firstly, resist pressure from groups that derive income on real estate transactions rather than long-term real estate performance to purchase houses, despite the loose requirements and rebates, and cash benefits cited by these groups and individuals.

Second, develop better insight and on the degree of speculation in the market today. It’s good to be mindful of the interest rates, pricing trends and availability of properties so that you can take advantage when any of these factors are in your favour.

Third, buyers are advised to consider other options. Renting a house, while watching the market is a prudent move, but for those that are eager to get a property nonetheless, it might be wise to broaden search to suburbs and areas outside of cities or even opting for older properties instead which might turn out to be more spacious.

Yes, there isn’t a fixed answer to the question of when is the right time to purchase a property. But it is still important to be mindful and consider the factors mentioned above as well as your personal financial situation and dreams and plans before investing in a property. An informed decision is likely a regret-free one.

If you’re considering to buy your home, start your journey now, do your research and contact us to begin comparing houses for sale in Malaysia today.

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