Malaysian real estate: How to know if the market is overheated or in a bubble?

Question

I'm living in Malaysia, around Klang Valley. One thing I notice is that the housing price keeps on increasing and increasing and increasing ( just my perception, no data to backup my point), with no sign of abating even during the tumultuous years of 2007 global economic crisis. I'm hoping for the music to end and the bubble to burst, so that I can get a house at a bargained price.

But the argument I heard is that house price will always increase-- due to the price increase in raw materials-- despite that generally the economic is not very good. Again the "economic not good" is just my-- and your average Joe on the street's-- perception. The "official" data shows that our GDP growth has been tremendous. The only thing is that the "growth", even if it's real, doesn't trickle down to average folks.

During launching period, people will line up in front of the developers' office, and units are sold in mere hours, regardless of how exorbitant or how unreasonable I think the price is. Of course a lot of government incentives were/are thrown in to encourage house ownership, such as low interest rate and NO selling tax. But the fact that middle class is struggling to meet a day's end and at the same time the house price is being pushed up all the time baffles me.

So, my question is, is the real estate market overheating? Or do you think that the estate price will still increase?

Edit: There is no question about the speculative nature of the current atmosphere-- it is really there. To give just one example, Setia Alam and Klang are separated by just a fence, and yet, the house price at Setia Alam is many times higher than that at Klang and the increase is showing no sign of abating as more development projects are announced. The only explanation I can offer is people are buying up the unfinished properties so that they can sell them later at a higher price when the houses are completed ( between launching period and finish construction no payment is required). I would have thought that the music is going to stop anytime, but it has been going on for a long time and I was proven wrong on so many occasions that I wouldn't want to bet against the general trend now.

Answer 1

I am also from Malaysia and I just purchase a property around Klang Valley area. Property market is just like share market. You will never know when is the highest peak point and when is the lowest peak point. Yes. Not only you, but everyone of us.

What I would say that, just buy according to your need and your financial status.

If you feel that you need a comfortable place to stay rather than renting a room, and buying that property will not burden your financial status too much, why not go for it?

The best time to purchase property is perhaps last year when world economic is down turn. But thing is over and can never go back. Since all of us don't have a crystal ball to tell the future, why not just act according to your heart and common sense (Buy according to need) ;)

Answer 2

The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating.

Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25.

If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated.

This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.

P.S. if anyone can find this article for me I'd greatly appreciate it, I've tried to use my google-fu with googling terms with site:fool.com but haven't found the article I remember.

Answer 3

FYI...during the housing boom here in the US many people spoke about ever increasing home prices. Many thought home prices could never go down. Until they did.

If it seems like it is impossible for home prices to continue to go up then they probably will stop going up at some point, although the rising prices can continue for a lot longer than you think possible.

I'm wondering if Malaysia is feeling the effects of the US FED which flooded the market with US dollars after the crisis. The Malaysian central bank holds US dollars as its foreign exchange reserves. In order to keep the ringgit from rising against the dollar the Malaysian central bank will print up ringgit to purchase dollars which suppresses the value of the ringgit. This has the effect of artificially lowering interest rates as ringgits become readily available leading to a boom - the boom being in real estate. Just a hunch.

Is the dinar in Kelantan getting much attention in Malaysia? This is starting to make a little news here.

Answer 4

I don't buy the "house prices will always increase due to the increased cost of raw materials" argument. In a lot of countries you will find that the cost of (re)building a property is substantially lower than its perceived sale value. If it wasn't, there would be no incentive for developers to take the risk of buying the land and building houses on it.

Say the cost of building the house is 50% of the sale price (which might already be generous). Materials probably account for half of the building cost so you've got 25% tail wagging 75% dog?

I'd start to worry if people buy property as a get rich quick scheme, which seems to be what you're describing.

Answer 5

I think the only sure way to know if there is a bubble is to wait till it bursts and buy then.

If it would be easy to tell there wouldn't be any bubbles.