Sunday, May 29, 2011

Housing for average income earner

By THEAN LEE CHENG | May 28, 2011

REAL estate industry players are asking the authorities to step in to control the spike in housing. International Real Estate Federation (Fiabci) Malaysia president Yeow Thit Sang says it is time the authorities look into the matter.

“Home prices have gone up so much that it has reached a ceiling to the point that high-end housing developers must give a 20% rebate in the condominium segment or there will be no sales,” says Yeow.

House prices have gone up many times beyond the average household income.

Yeow says the scenario of low-occupancy and falling prices can be found in KL City Centre and Mont’Kiara. “Overall, developers need to slow down,” he says, adding that KL Sentral is another area where office and retail properties are undergoing continuous development.

Yeow says the Housing and Local Government Ministry and the relevant authorities can play a greater role in controlling prices. They can do this by studying the needs of the market – the take-up rate, the number of people entering the Klang Valley to seek employment, the number of expatriate entering or leaving the country, and which type of housing is facing a shortage.

“They can approve or not approve applications by developers. For example, there are too many condominiums in the KLCC area which cost millions of ringgit,” says Yeow.

He says expatriates are the ones who mainly occupy these units. Many who bought into that location are local and foreign investors who expect a certain yield. When they do not get the yield they want, they may decide to sell it instead of holding on. When this happens, there is always the possibility of prices coming down.

In London, Hong Kong, Singapore, China and Australia, the authorities will study the housing needs of cities. “We must do the same,” says Yeow. Currently, this is being done on a five-yearly basis, which is far from the ideal, says Fiabci Asia-Pacific executive director Yu Kee Su.

The people need medium-range housing priced around RM300,000, says Yeow.

Khong & Jaafar managing director Elvin Fernandez says some form of measures targeted at the property sector should be put in place.

“It would be difficult for the authorities to know when to apply the brakes and when to lift the foot off the pedal if we are to use demand and supply to control prices. A better measure would be to bring back the real property gains tax on a graduated level to help curb speculation.

“A second measure would be to extend the 30% downpayment requirement for second property instead of the third and subsequent residential purchase,” says Fernandez.

Last November, Bank Negara required buyers of third and subsequent residential properties to pay a minimum downpayment of up to 30% while the remaining 70% constitutes a loan. Analysts say this is just a temporary setback.

Fernandez also suggests doing away with mortgage brokers.

“Banks want to increase their share of property loans and engage mortgage brokers, who are not bank staff. These brokers’ interests are not aligned with the long-term interest of the banks. They only want their commission.

“The services of mortgage brokers is something that came out of the United States. Are these mortgage brokers doing a service or a disservice to our banking system and to the house buyers?”

Yeow reiterated the need for housing to be priced in the medium range of about RM300,000 because this is what the average wage earner can afford even in the Klang Valley.

However, he notes that it is difficult to find houses with this price in the Klang Valley or Penang and this is worrying. Yeow says that the most pressing issue now is escalating prices and the question of affordability among the ordinary wage earners.

His concerns are very real. House prices have moved far ahead of wages. Yeow says the average monthly household income is about RM7,500 while Fernandez puts it at close to RM6,000. He is quoting a private survey done for the Klang Valley this year.

RAM Holdings Bhd economist Jason Fong says that at the national level, the average monthly household income in 2009 was RM4,025. Putrajaya has the highest monthly average wage of RM6,747 while Kelantan has the lowest at RM2,536.

On a sectoral basis, Fong says the average wage for manufacturing sector (March 2011) is RM2,240 while for wholesale and retail (fourth quarter 2010) is RM2,219 and for rubber plantation (March 2011) is RM826.

Kuala Lumpur has the highest average transacted property price at RM488,536 last year, says Fong. This is the least affordable relative to income levels in Malaysia in 2009.

In the east coast, the lowest transacted price in Terengganu was RM74,063 while in Kelantan was RM82,337 – both were relatively affordable.

Fernandez says there is a need to look at housing from the perspective of the ordinary wage earner with an average income of about RM6,000 or less because of the relatively low wages in the country. “We cannot look at housing from the perspective of those earning RM15,000 or more a month. In 2008, only 1.7% of the entire population drew a monthly income exceeding RM15,000, and only 5.2% earned more than RM10,000.

“In the Klang Valley, only about 3% earn more than RM15,000. This means there are not many rich people in Malaysia,” says Fernandez.

He points out two fundamental factors that drive house prices – household income and rental returns.

House prices, as against annual household income, is normally calculated at three to four times. For example, if a household monthly income is about RM6,000, which is what the average Malaysian household earns, at four times, the price of the house should be about RM300,000 (6,000 x 12 = 72,000 x 4 = 288,000).

In the Klang Valley, this has gone up to 15 to 20 times. In places like Kajang, house prices against annual household income is about four times. “Such areas are relatively untouched by the rapidly rising prices in other parts of the Klang Valley. Their yield is, therefore, higher, at 3%.”

While housing prices have gone up, rental has not.

A double-storey house in Petaling Jaya was priced at about RM500,000 about two years ago while rental was between RM1,500 and RM1,700.

Today, that same house is priced at about RM800,000 but the rental is only RM1,800 to RM2,000. So although house prices have gone up, rental rates do not reflect that rise.

Condominiums used to have yields of about 8% while landed housing about 4%. Both have fallen to about 4% and 2% respectively today.

RAM Rating Services Bhd head of real estate and construction ratings Shahina Azura Halip says the affordability issue is expected to persist as prices of residential properties, especially landed units, are likely to increase this year but at a much slower pace than last year.

This is fuelled by the keen demand, higher land prices and construction costs, as well as the scarcity of landed properties in prime locations.

“Bank Negara’s 70% cap on the loan-to-value ratio for buyers’ third residential property mortgages will deter speculation to some extent – particularly in the high-end segment – although the impact is not expected to be as significant in the long run, given the strong fundamentals supporting demand for homes,” she says.

Meanwhile, Shahina says, the Government’s recent announcement on the My First Home Scheme, which will enable those earning less than RM3,000 per month to obtain 100% financing for the purchase of their first house costing RM100,000 to RM220,000, is a positive move for the market.

“The main consideration, however, is the availability of either landed or strata-titled units in this price range, especially in Kuala Lumpur, Selangor, Penang and Johor,” she says.

Both Yeow and Fernandez are of the view that, at the rate house prices are moving now, those who have not bought their houses will not be able to afford one because salaries are not growing in tandem with inflationary pressures.

Says Yeow: “We are in a situation where people are using the property market to gamble.

“It is purely to flip. This is bad because it will only drive prices higher. This deprives the average wage earner of buying his own house.

“The Government is trying to stem the bubble with various measures,” Yeow adds.

Sharp property price hike puts a damper on affordability

Thean Lee Cheng writes on how the sharp property price hike has put a damper on affordability. May 28 2011

LONG-TERM sustainable house prices ought to be determined by two key fundamentals – household income and rental returns. The relationship between household average annual income and property prices is an important one as it measures affordability levels.

If the average annual household income in the Klang Valley is RM72,000, this means the family can afford a house that is three to four times the annual income; that is, a property priced between RM216,000 and RM288,000.

This is just a rough guide. If commitments are high in other areas, they may not be able afford a property priced within this range.

For a long while in Malaysia, this number hovered between three and four times. In the United States, it was about eight times in many of the overpriced cities just before the financial crisis hit the property market.

Last year, certain parts within Petaling Jaya began to inch up to five and six times. This means households had to fork out more in order to buy properties priced between RM360,000 and RM432,000.

At that time, the property consultant who did the study said that at five to six times, this was still managebale and was not a cause for concern.

About two months ago, another study was done by the same consultant. This time, more areas within the Klang Valley were included. It was during the course of this study when it was found that within the Klang Valley itself, the prices of certain locations have gone up far ahead of others. This is not something new, all of us know that. But what is startling is that property prices that used to be five to six times a household’s annual average income has gone up to 11 times about two months ago.

While Kajang continues to have a household income/property price ratio of 4 times, in other parts of the Klang Valley, this has gone up to as high as between 17 and 20 times in some areas. There is a caveat: all of this is viewing house prices from an average household income of RM6,000 a month or RM72,000 a year.

As with the use of any statistics, there is always a margin of error. The prices of properties are for all to see in the classifieds. The question is: What is the average income in the Klang Valley?

The company which did the study used RM6,000 as an average monthly income in the Klang Valley. Another property-related professional said it is about RM7,500 a month, while an economist says it is slightly more than RM4,000. The figure varies even more for different states

The fact that we, the average salaried workers, are ready to buy into properties that are many times our annual income is food for thought and cause for concern.

The other fundamental governing house prices is rental returns. In most of the areas that were included in this analysis between house prices and household income and rental returns, the trend is clear over the last 10 years, the returns are dropping.

In many of the areas where prices have increased, the rental returns of the typical terrace house have dropped below 3% net. In some areas, it is about 2% net.

With the situation the way it is today, real estate professionals are calling for the authorities to put in place greater measures.

In China and Singapore, various measures have been put in place to cool prices the past year or so. Since last year, the Chinese government has introduced a series of policy measures to cool the market. This includes raising interest rates, raising down-payment requirements, directly restricting home purchases, imposing price control targets in Beijing and Shanghai and finally charging a real estate tax, albeit on a trial basis, in Shanghai. Nevertheless, prices remain stubbornly high.

Early this year, the Singapore government required those who buy, and sell, residential properties within four years to pay a stamp duty, up from the previous requirement of three years. Other measures include making it mandatory for individual buyers, who are still servicing an existing loan, to borrow only up to 60 % of the new property’s value, down from 70% previously. For corporate investors, the loan-to-value limit has been cut to 50%.

What is emerging today is Chinese developers and owners of malls are now offering investors their assets. According to a fund which is on an acquisition trail in Asia, the company is looking at commercial properties at a “flow rate” of one property a day, which, according to the source, is very high.

These developers and owners essentially want to make their exit. In the commercial segment in Malaysia, developers here are also beating a path to the same fund to sell their assets. Thankfully, not at a flow rate of one per day.

·Assistant news editor Thean Lee Cheng is wondering what it takes to douse this madness.

Tuesday, May 24, 2011

Do We Have a Property Bubble?

As an investor, I should obviously be pleased with the prices of properties we see today. However, I feel suspicious more than pleased... About 5 years ago or less, we were looking at studio apartments in the city center being priced below RM200k for example a 350sf studio in Casa Mutiara was going for RM180k. 2-3 bedroom units at the city fringe such as Titiwangsa Sentral at Jalan Ipoh were going less than RM300k. This gives many junior executives with a salary of around RM3500 and below an opportunity to purchase a property to invest in or to live in. But today, city properties have now appreciated in most cases 100%. However, salary remains the same and rental income has not really gone up a great deal. And in the case today where some areas are witnessing a glut, rental has indeed dropped. So, what was once an 8% to 10% rental yield investment has become less than 6%.


What more surprising is even new launches at far flung ulu places like Shah Alam are selling 665sf studio units at RM330k and above! The project with the floor plan below will be managed by Best Western and comes with a Guaranteed Rental Return over a specified period. Then we have got the Eves Suite launching in Ara Damansara from RM360k for a 680sf studio unit! Ara Damansara is a good area. But RM360k???

Do we have that many people with this kind of disposable income to invest? And not to mention the tenants to pay that 6% yield these punters are asking for. With a RM330k investment, one is staring at a RM2000 monthly installment. So, only those with a salary of RM3500 and above are going to be able to afford. I won't be surprised that punters like us with already a few properties in our portfolio are those who can afford to go in. So yes, there may be some buyers, but where are the tenants?

Thursday, May 19, 2011

Signature Campaign to Convert Leasehold to Freehold


There is a signature campaign on going to solicit support from home owners in PJS9 Bandar Sunway to convert their leasehold titles to freehold.
PJS9 is one of the earliest phase of Bandar Sunway developed by the then Sungei Way Group (now known as Sunway Group). It is located literally beside the busy Sunway Pyramid shopping mall and Sunway Lagoon theme park. There are also 3 major colleges in its' vicinity - Sunway College, Monash University and One Academy. The housing area consists mainly of double storey link terraces and semi-detached units.
I do not know on what basis the house owners are lobbying for conversion of their titles. However, I DO NOT support this campaign and I hope the Selangor state government will reject this application.
The property prices here are already too high - if they get their freehold titles, the prices will definitely skyrocket beyond affordability. At launch, these houses were sold on average between RM160k to RM200k. Now, a double storey link intermediate unit is going for RM600k and above. This will cause many owners to sell their houses and most new owners who have paid a bundle for properties here will rent their houses to students because the private student market now contributes the best rental yield in any properties. Here, students pay up to RM1500 for a master bedroom. The cheapest rent is no less than RM400 for a small room with fan.
So, the impact is, PJS9 will see a larger influx of students and existing students will be forced to pay an even higher premium so that the owners can recover their costs.