Malaysian property prices and the property bubble
Have property prices climbed so high that they are forming a property bubble?
Are property prices that high in Malaysia and Singapore that it appears that there is a property bubble in the works? If you are looking for properties in Petaling Jaya or Subang Jaya a double story terrace or linked house goes for RM450k (USD$150k) to RM650k (USD$230k) . In some parts of Subang Jaya, the owners are asking for RM800,000 (USD$270,000) for a double story link house (terrace house) but they will not sell. It is just a carrot they dangle in front of you. Is this a property bubble or hot air?
Terrace house size in Malaysia
A double storey link house various in size form about 20ft x 60ft to 25ft x 80ft.
Property prices in Petaling Jaya and Subang Jaya
In Petaling Jaya the semi-detached houses are going for RM800,000 (USD$270,000) and some are asking RM1,000,000 (USD$333,000) plus plus. Property prices of bungalows can be anywhere from RM1,800,000 (USD$600,000) to RM18,000,000 (USD$6,000,000). And if they are beautifully renovated they are asking for much more. I hear a lot of talk that property prices are too high. Five years ago, in 2006, property prices for a single storey terrace or link house in Petaling Jaya went up to RM290,000 (USD$97,000). Today the property prices are much higher. In Petaling Jaya and Subang Jaya they are asking for RM300,000 (USD$100,000) to RM400,000 (USD$133,000) for single storey terrace houses and in some parts of Petaling Jaya there is only about 60 years left on the leasehold title. After the 60 years the property goes back to the government if no one renews the lease and that is another expense you need to watch for.
Per square foot property prices
That works out to be a property price of anything between RM375 (USD$125) per square foot to about RM400 (US$133) per square foot. Is that expensive a property price? A price to heavy to pay for property?
Land price in Petaling Jaya
The residential land is valued at RM150 (USD$50) to RM300 (USD$100) per square foot in Petaling Jaya. Prices in Bukit Tunku (Kenny Hills) and Damansara Heights can be much higher. The pricing varies depending on whether your property is away from the main road nested in one of the housing estate islands or main frontage. Malaysian properties that have main road frontage, especially bungalows, can command a premium as they can be used for commercial purposes. This can be done by either changing the status on the grant / title, from residential to commercial or by applying for a permit to operate a business from either of the town councils: MBPJ or MPSJ. Residential property prices can be good if they are away from the main road and traffic noise.
Some of the determinants of property prices
Furthermore, other factors determine price, such as whether the location is walking distance to a school, college, shopping complex, LRT station or bus stop. The reason behind these factors is convenience especially if you are planning to rent out rooms or the whole house. It becomes a source of rental income which can be used to contribute towards your loan repayments. But beware that almost every seller in these locations are very aware of the marketability of their property and you may end up paying a premium for such property. Why not? The tenants are contributing to your bank loan payments. If you are looking for property as investment you need to check for these three factors and they are location, location and location. The most important criteria that will determine a good return on investment for the property prices paid, is the location.
Is a shortage of land in the Klang Valley creating a property bubble?
There is a shortage of land in the Klang Valley that is causing property prices to climb and in turn making rising property prices look like a property bubble. Do you remember what it was to drive down the Federal Highway back in the 1960's? Did you know that all the land along either side of the Federal Highway from KWSP (EPF) area, down the road through Petaling Jaya and Shah Alam and all the way to Klang was sold to big corporations by 2007? My guess is that they bought those locations for the main road frontage and easier access to the Federal Highway. I have not checked as of today but my guess is that even the Chinese cemetery in Seksyen 15, Shah Alam, has been relocated to make way for development. The authorities have opened up Shah Alam 2 but it is taking time to populate the area as it is much too far from Petaling Jaya and Kuala Lumpur. I remember, back in 2005 or there about, I took some Korean investors to view the factories for sale over there. The property prices were reasonable and the factories were 40,000 square feet or larger. Each factory was located on about 3 acres of land. After a tour of the premises and nodding and shaking hands, one of the Korean investors asked me "Where is the pub?". No night life. Then and there I knew that deal was dead.
Property prices for apartment and condominiums
If you are looking at apartments then property prices range from RM130,000 (US$43,000) to RM2,000,000 (USD$670,000) in Petaling Jaya. You are complaining that the property prices are too high, right? Apartments vary in size from about 800 square feet to about 3000 square feet. That means a small basic apartment would cost about RM160 (USD$53) per square foot. There is a maintenance fee for apartments which are 'gated communities' and fees vary from RM100 (USD$33) per month to more than RM1000 (USD$330) per month. I can tell you a little about Kuala Lumpur and KLCC area. In 2003 the land price at KLCC was about RM600 (USD$200) per square foot. By 2007 owners were asking about RM1000 per square foot and after that property prices for new condominiums went up to RM3000 (USD$1000) per square foot.
Why do property prices keep climbing and does it mean a property bubble?
Property prices will always keep climbing because of inflation. Inflation is the condition where prices rise year by year. It means that, at 8% inflation, if you paid $100 for goods today, you will pay $108 for the same goods next year and $116.64 the following year. In Malaysia, historically, property prices have been climbing at an inflationary rate of 8% per year and this figure has been quite consistent for the past forty years. There may have been ups and downs in inflationary pressure of property prices but when averaged over the long term it has been hovering around 8%. Actually, the property prices climb is not a linear, straight line, climb but more of periods of spurts in price increases and periods of stagnation in prices, occasionally tempered with price drops due to major economic fall outs. Is an economic crisis created by a property bubble? During economic crisis the property prices which fall are generally from owners who have lost their sources of income and cannot pay back their bank loans. Forced selling will cause sever falls in property prices.
How do you grow to beat inflation?
Remember, in the previous article, making sound investment decisions , I had mentioned that you need to make investments. The first rule is to invest in you. Many investment analysts will talk you into investing in this scheme or that scheme but this takes money out of your pocket and puts it in someone else pocket. If you are at a point where the spare cash is very little, I would suggest that you invest in yourself and your children. Forget all the fancy schemes out there. When I say invest in yourself, I mean make it a greater priority to buy your own house instead of renting. And when I say 'make it a greater priority to buy' I didn't mean rush out and buy a house right now. I mean prioritise in that direction, for example putting some money aside into a savings account or a bond fund. The interest from such investments is not as critical as the fact that you are accumulating a nest egg to purchase a house later. Later meaning next month or next year or in ten years time. Another day I will explain how I 'arranged a plan' for some of my clients when I was working as a Unit Trust agent but not today. Lets talk about the property bubble and how property prices are climbing. What is all that 'hoo har' on property bubbles about and are increases in property prices a load of hot air or founded on solid ground.
How does inflation affect us?
Most of us do remember what prices were when we were children. I remember in the 1960's, my parents gave me 20 cents for meals at the school ‘tuck shop’. Now days, I believe some parents are giving their children as much as ten dollars. My mum remembers that the price of eggs in 1965 was 10 cents (RM0.10 or US$0.03) but now, in 2010 or 2011, it is 40 sen or US$0.13 (terminology changed from "cents" to "sen"). I did search the internet and found that the price of an egg was 3 cents in 1941 (US$0.01 at today’s exchange rate). Don't you think property prices should follow a similar trend?
Now just look at the chart of Egg Inflation and observe what will be the price in 2020 and 2050.
Let us wait another 4 to 5 years and see if, in 2015, the price of an egg is RM0.50 (US$0.17). In 10 years, in 2020, it is expected to be about RM0.60 (US$0.20). Would would happen if inflation was 5%? I brought this chart out as I could use it to explain some of the price increases in properties and you could decide if we are in a property bubble. For a comprehensive explanation of this chart please refer to my article on inflation and investment. So, compared to the price of eggs are property prices too high and are we in a property bubble? I ask you, when you are 83 years old and the price of an egg is anywhere around RM1.50 (USD$0.50) to RM3.80 (USD$1.27) per egg, (sunny side up?) where is your income going to come from? From your pension? Can you buy eggs with it? So , please, invest in yourself first, make sure your house is fully paid for by the time you retire.
If you think we are in a property bubble then it's best to wait for the property bubble to burst as property prices will be cheaper after the property bubble bursts. Then you will be clapping your hands with joy for waiting and getting it cheap. When will it occur? 2011? 2012? 2013? 2014? 2015? 2020? 2030? By 2030 I would have gone, would you be still waiting? What happens if the property bubble doesn't burst? You waited and waited and the property prices went up some more! Ouch! that is going to be very painful. Beware of the fake property bubble.
Remember those single storey terrace houses I was talking about earlier? Way back in 1971 the developers were selling them for RM12,000 (USD$4,000). Five years ago they were going for RM290,000 (USD$97,000). I cannot tell you what those property prices are today as I don't have sellers.
What do you think is happening to property prices in Malaysia and Singapore? Have the property prices climbed so high that no one can truly afford to buy them? People, the locals are still carrying on with purchases of properties, right? Is there a glut of properties on the market? I suspect there may be a glut at the very high end of the market but is the high end a property bubble? No I don't think so. As for the middle income and lower income groups, I still suspect that the market is still vibrant.
This is the scenario I tell many of my clients. "My grandfather always complained of property prices rising and how expensive properties were, last century. If he had bought that god forsaken cemetery in Jalan Sultan Ismail back then when people were 'paying you' to buy it, I would probably have inherited a 'billion dollars'." Just like that horse shaped piece of land in Bukit Bintang. Property prices will always rise but do take a long term perspective. Remember, in 1970, in Bangsar, the double storey terrace house was priced at about RM10,000 and now they are going for easily RM800,000 - for a terrace house! Did you meet anyone who talked about a property bubble in Bangsar? It does sound ridiculous - a property bubble in Bangsar or Bukit Tunku for that matter, doesn't it? Actually, I have never met anyone who complained that the property prices in Bangsar were too high, let alone exorbitant.
What do you think we should do about this idea of a property bubble? Property prices will always go through the roof for those who never bought any. Gains in property prices will always be better than the bank interest rate and it is a safer investment. The bank can close but your property will always be standing where you saw it last. The prices of gold and silver can always go up and down but you will always have a roof on a rainy day if you own your own property. Furthermore, what do you care about property prices going through the roof or the property bubble if you already own your own roof?
Inflation has this singular effect, and that is, in your old age you will never be able to afford what you once took for granted during your youth.
If you would like to do similar analysis with your own data on property prices please click on this link to go to my property prices inflation calculator - Egg Inflation Page in order to do more analysis. If the property bubble bursts property prices will probably drop by 10% to 30% at the high end.
If you need to do more calculations on property prices, off line, please download my free Excel Worksheet based loan calculator, "Dr. Peter's Loan Calculator" and you can work off line.
Actually, I would like to take you back to basics and show you the bigger picture on property prices and the property bubble. Please refer to my previous article on 'causes of economic crisis recession and high inflation or hyperinflation' that explains the way property prices increase and the property bubble
If you did find this article very similar to 'Are property prices creating a property bubble in Malaysia and Singapore?' please do forgive me as I am doing some research and analysis on Search Engine Optimsiation (SEO) with the keywords property prices and property bubble. This was a good article on property prices and the property bubble, right?
- Dr. Peter Achutha, 29 July 2011