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No Helium Balloon Flies Forever

Posted by Simon Templar On Tuesday, February 23, 2010

During Chinese New Year, just like any other festivities, you meet up with friends and relatives. Lots of them. You chat about money, you gamble, chat about money again and then more gambling. Politics usually take a back seat - doesn't seem like an appropriate topic. Too much fire in it I guess.

What do people do with their money nowadays? My small sampling says buying properties - commercial and residential. Everyone seems to be into it. And we are not talking about about 1 or 2 units anymore nowadays.

I like properties. Capital appreciation could be in significant amounts. Or had you done your homework, someone else will be paying your monthly instalments via rentals. All you need is some downpayment (which in some cases has been brought down to negligible amounts by the developers) and a decent payslip to qualify for never before seen super low interest rates.

What we have now, particularly in the Klang Valley, are recipes for a property bubble that is getting out of hand. The bubble has been growing in size for the past few years with the KLCC area taking the lead. The super charged KLCC area is now a little dampen with the targeted foreigners affected by this never ending financial turmoil or 2008, 2009 and now 2010 (of which we have not seen the worse yet - I am confident).

Properties surrounding KLCC have dropped by some 30% to 40% since 2008 and have yet to recover. Many are betting that the prices will rebound as Singapore and Hong Kong have. I beg to differ. We will revisit this a little later.

But out of the KLCC area, favoured areas have not seen any slide in prices at all! Look at the hot areas of Puchong, Mont' Kiara, Mutiara Damansara, Bandar Utama, Setia Alam and Desa Park City; just to name a few. The IOIs, Gamudas, Sunrises, See Hoy Chans and SP Setias are coming up with all tricks in the book to keep their pockets fat. And the tricks are working darn well for them.

Developers are throwing offers, consumers (Klang Valley at least) are cash rich, home loans are dirt cheap, new launches are getting more and more expensive. This is heaven for property lovers! There is simply none better to do with your money with the stock market being too uncertain and the FD rates being close to being negligible.

Take the success story of SP Setia's Setia Alam. Did you know that they need not push for sale and neither do they need to spend vast amount of advertising money? All launches are sold out before it is actually launched. Yup. Snapped up like pisang goreng. Houses in the area have appreciated by at least 50% in the past 2 years. (And I am being conservative with the figure). I know of a buyer of a bungalow plot at Eco Park who paid RM55 per sq ft 5 years ago and had recently been offered RM145 per sq ft. He does not even know the exact location of his land. That is close to 200% profit in 5 years. Where else can you make such money?

Everyone is going nuts. Buy at launches and sell upon completion. The developers will ensure you make money as they push the prices of their new launches up. You pay RM25,000 downpayment for a RM500,000 house. The developer bears the legal and related costs. You pay nothing else as the bank pays the progress billings. You sell your unit at completion for RM750,000. And make RM250,000 with only RM25,000. So what if the government taxes me. Have you seen my returns vs cash outlay?

But if everyone is buying new launches, who's buying completed units? Take a tour of Setia Alam. The area is still rather quiet; okay it's new. But why aren't the completed units being filled up if the demand for the properties are truly that great? Simple. There are not enough people to fill up these premium locations. We have 27 million people but how many of them are located at Klang Valley? Property is being sold out because people are buying a few units each - all for property speculation. Bulk of these buyers don't intend to stay there. Okay some of them have a few mistresses but let's not go there. Everyone is making profits - but unrealised profits.

And what is truly scary is the perception of the property prices in Klang Valley. Buyers live on the herd mentality. Everyone is chasing this area so I have better get one too. Never mind if the prices are already high. People who bought the same area 5 years ago have doubled their value. So and so area is even more expensive.

Hang on. That is not how a property should be valued. What have happened to fundamentals? Down the drain. What we have now is a typical bubble. The bubble will grow larger and larger. But all bubblegums will burst at one stage when it is no longer sustainable. The Klang Valley property market is close to that.

Let us take a back seat and see the larger picture. Don't compare. But look at the properties individually. 22 x 75 terrace houses in Bandar Utama are going for RM700,000, intermediate unit. That's not a lot of space. And you definitely have to park your extra cars outside your house. 22 x 75 terrace houses in Desa Parkcity is going for above RM1,000,000. That's Kepong not too long ago.

These are terrace houses. Intermediate units. Not semi-ds or bungalows. Not all of them are even nice to look at. But in what way are the prices justifiable? Do you know what is the average Malaysian's household income? Did you know that most Malaysians do not earn RM10,000 a month?

How do these people pay their monthly instalments? And you are telling me that this is sustainable? That the property prices will continue to appreciate? It sure looks like Malaysians are incapable of taking a step back and look at the situation. What I find astonishing is that Malaysians actually believe the pitchings of the sales guy and property agent. It is like saying you believe that our used car dealers refurbish their used units prior to selling to you.

Semi-ds in Setia Eco Park are going for RM1,200,000. And the buyers quietly tell you that 'it is not even that big'. Yeah. Exactly my point. But then they tell you that it is cheaper than Bandar Utama or Desa Parkcity.

If this is not a bubble I don't know what is. Have you even heard of stories about commercial properties?

We are not Singapore. Neither are we Hong Kong. I am not saying this because they are advanced economy while we are not. I am saying this because they are blardie islands for crying out loud. They don't really have that much land you know. We on the other hand have a whole lot of land. When the developers are done with Puchong, they move to Semenyih. When those in Setia Alam are done, they move to Rawang. The Bandar Utama fellas probably already got their Sungai Buloh land ready. We have a lot of land and very little people. The Singaporeans and Hongkies have a lot of people but very little land. That is certainly not apple to apple.

Property prices must be supported by fundamentals. The market must be in equilibrium of demand and supply. Speculative trading will not last. Low interest rates will not last. I hope many of you realise that when the property bubble bursts and your houses are worth 60% of your loan, the banks will not give you a 40% discount. Neither will they help you to extend your loan tenure to 100 years because you have 5 properties to pay for.

A little gambling is good. I love it actually. I was heavy into property a few years back but I've trimmed them down the past few years because I think we have breached the fundamentals. Where is the balance of risks? My view is that our property market is too risky now. High risk, high gain - yes, that's true. But irrational risks puts you back 10 to 20 years when the bubble bursts. Why risk all that you have worked for in the past 10 to 20 years just to increase your pool by another 50%? Is it worth it?

Is Malaysia still what she is 10 years ago when we were the darling of trades? Will there be a sub-prime 2? Will the sovereign debt defaults escalate?

Lets assume that the bubble continues to grow for the next year or 2. Then comes GE 13. If Pakatan wins, our Malaysian economy will fall into a hundred pieces. Make no mistake about this. No FDIs love a political unstable country. In fact foreign funds will flow out. Our stock market will crash. The economy will slow down to a halt. But I am prepared for this. We want a new government and so for that we must be prepared to start afresh from ground zero. If Pakatan does win, expect us to take a while to climb up. Maybe 5 years if we are lucky. Maybe 10.

And this is what I told my friends last week. Here I am calling for a change in government. And people are telling me that I must invest in properties. And if I do and then Pakatan wins, I may lose say RM500,000 in property value. So, do I fight for what I truly want to fight for so that I get the ultimate chance to lose half a million bucks in money I do not have and then repay the bank for the rest of my live? I must be the ultimate masochist to be doing that!

2 Response to "No Helium Balloon Flies Forever"

  1. Anonymous Said,

    A nice, truly down to earth analysis of the current properties market. I wish you well Simon...write more, as your brain tells you on the moolah in your pockets!

    ~ StopSpamming


  2. Anonymous Said,

    Yes. we think you are right on. however, "There is a sucker born every second of the day". How true the saying is. No gambler will ever stop until he has burnt all his fingers, hands and toes (not to mention his brains).


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