As the ringgit declines and as US quantitative easing reduces, the era of low interest rates and cheap credit via bonds – the drivers of speculative investment – may soon end. Can that lead to the popping of the property bubble?

For the past few years, most Malaysians have realised what business journal Forbes has now articulated: Malaysia’s economy, together with high property prices, low interest rates, rising federal government and household indebtedness, shows all the signs of a classic credit and property bubble. The Finance Minister for Malaysia, published the 2014 Budget at Parliament. Among few of the significant changes the country will face, such as the introduction of the Goods and Services Tax (GST), he also mentioned that the minimum price for foreigners to purchase propeties will double from the current RM500,000 to RM1million.

The real property gains tax (RPGT) rate has increased to 30% for citizens who sell their units within three years. For disposals within the holding period of up to four and five years, the rates have risen to 20% and 15% respectively. For disposals that took place in the sixth year and so on, no RPGT will be imposed on citizens, but companies will pay tax at 5%. Foreign buyers are subject to a RPGT of 30% on the gains from property disposal during the holding period of up to five years, and for sales in the sixth year and subsequently, a 5% RPGT is imposed.

The years 2014-2016 is the crucial time for the repayment of housing loans. This small factor can cause a financial meltdown. Most banks double interest rates from 4.25% to 8.5% per month if you fail to pay your installments for three months. Many people may default on their loans and market value of properties held by banks will decrease.

The International Monetary Fund (IMF) has warned of another possibly disastrous housing crash given that property prices are still well higher than their historical averages in many countries in relation to incomes and rentals. The world financial institution says the situation has emerged as one of the biggest threats to economic stability.

Is Malaysia faced with a risk of a property market bubble and should we be worried of a damaging burst of the bubble given that the inflated prices of property apparent in the last two years may not be sustainable?

National House Buyers Association (HBA) honorary secretary-general Chang Kim Loong said that in the event borrowers are unable to pay their mortgage installments and the banks are forced to auction off their properties, “there is a risk a property bubble in Malaysia can burst, just like what happened during the sub-prime crisis in the US.”

However, CB Richard Ellis Malaysia executive director Paul Khong does not predict any serious bubble in the market, specifically this year, and further predicts the market to continue to march ahead towards the second half of the year.

“The first half of 2014 has been relatively quiet as predicted earlier, as the property market has been absorbing the market cooling measures silently hoping for some good news. We currently see the secondary market becoming slightly active and prices in select locations are now looking relatively attractive,” Khong says.

In my opinion the Malaysian property bubble is not a question of “if” it’s a question of “when”.

I myself have been shocked at the property prices that people are expecting. I visited a 4 bedroom property in Ampang the other week and walked around a property that needed a new drive, new marble flooring, no air-conditioning, no lights, a new kitchen, a new bathroom, it had dry rot on the balcony, needed new swimming pool tiles and a whole lot more!  Literally everything and the cost of this dilapidated half finished home…….  RM3.4 million for a property that was not in a gated community and in a rundown road.

Anyone with sanity would conclude, that for USD1 million they could get much better deal in the UK or America.

I have already sat on the side lines at some distressed sales here in Kuala Lumpur and I have seen units in my own condo go for RM1.2 million, for 2,600 square feet, my home is situated in the center of KL and an identical unit was valued at over RM2 million two years ago. This condo is around 6 years old, still looks modern and is a 15 minutes’ walk to KLCC. This same residential block recently sold a penthouse which was 6,400 Sq Ft at auction for RM2.4 million; a distressed sale from an expat that was sold the dream!

In my opinion, the cracks of the Malaysian property market are not just starting, they are erupting as we speak; with a number of factors such as GST being implemented, higher mortgage rates, the weakening RM and expats leaving the capital. This all means weaker demand and eventually the property bubble will burst.

Property agents say to me that the market is fine; however, when you get to speak to a more honest and experienced agent, they will open up. A large number of agents agree that the home prices are ridiculous and that the market needs a correction. The well-known property websites that rent and sell, are all inflated and have some ridiculous values put on them. This is not the fault of the site, it is certain agents/owners that demand silly prices.

You can negotiate apartments from RM10,000 a month for RM5,000 a month, so how can you trust what is listed?

There is little honesty on these websites and in my opinion, they look to take advantage of the unsuspecting consumers and people with little knowledge on properties in Malaysia.

So why are prices doomed to fail in Kuala Lumpur?

To start, the expats are diminishing in KL and its surrounding areas and so is the demand for overpriced properties. Another realisation is that the larger oil and gas companies are now giving their expat employees a monetary package, so they can go and hunt for a property and negotiate their own price. Gone are the days where big oil and gas firms have a set budget for property and pay RM15k for a property worth RM8k a month.

Agents had a field day with this and this fueled unrealistic rents. However, these days are now numbered and rents are very low indeed.

Now that this RM15k is paid directly to staff, they are being a lot more careful on squandering their own pay; why pay RM10,000 or RM15,000 per month when you can get nearly 3,000Sq Ft for RM5k unfurnished or RM6k furnished?

The property market here is very unstable and simply googling the bad news and negative posts will open up a realm of information. Please remember that the agents and companies that post the positive property news and figures, do have an agenda and that is to make as much commission from sales and rentals as possible, so painting a positive picture is the best course of action!

The above is just my humble opinion on the property market in KL and I stress the importance of research; you yourself can pick up a bargain, but you must take your time and shop around. If you need any additional information, please feel free to contact me.

I hope that you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia