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Home NewsCrunch time for Malaysia’s property market?

Crunch time for Malaysia’s property market?

Malaysia’s property market is a lesson in how economic policy affects the market. Respected economists are gathering with portents of an imminent crash while other onlookers believe the market is simply leveling. So what exactly is the truth?

After the global financial crisis of 2008, Malaysia’s property market experienced a period of boom. It attracted developers and property investors while the construction sector and the suppliers of building materials experienced reciprocal growth. With new luxury and mid-luxury properties appearing on the market, consumers too, felt positive about the future, property prices rose as homeowners aspired to moving up the property ladder.

Within this climate of expansion the central bank fixed base lending rates based on a buoyant market. The rates were low to encourage investment and as interest rates are tied to the base rate, it made mortgage borrowing easier. The problem is that this creates a bubble as the low cost of borrowing and rising property prices results in a mismatch between supply and demand.

The only way for the financial markets to control the bubble is to raise the base lending rate which will, in turn, cause lenders to raise their interest rates. More expensive borrowing will help slow the market and enable it to find a better balance between supply and demand thus avoiding a market crash. It also means that developers who have borrowed to build new properties and new developments may no longer be able to afford them and have to abandon their plans. Similarly rising interest-rate costs on mortgages (and a decreasing demand for the supply) may cause property investors and landlords to rethink their rental values or consider selling their units at a reduced price. Home owners will be hit by a double whammy; an artificially high initial property price followed by an increase in mortgage repayments thereafter; many may find themselves no longer able to afford the next step on the property ladder after all.

Malaysia’s property market is facing similar, not because the base lending rate has been raised but that lenders have maintained higher interest rates on loans than the base rate they have borrowed at. Property prices remain high and when coupled with oversupply and high interest rates that make getting a mortgage difficult, it has lead to a glut of unsold properties. Figures from the National Property Information Centre show that from the first quarter of 2017, RM10.08 billion worth of residential units alone are sitting unsold in Malaysia.

You would expect economists to be calling for interest rates to be lowered to encourage buying but in a feature for Free Malaysia Today, Carmelo Ferlito, a leading figure at the Institute for Democracy and Economic Affairs, advocated minimal intervention. He said Bank Negara should refrain from supporting the property industry by lowering interest rates in order to allow market forces to right the discrepancy. “Intervention will only result in a longer and more painful crisis with prices kept artificially high by the central bank when the market is demanding lower prices.”

Whether the banks intervene or allow the market to find its own equilibrium between prices, the cost of borrowing, supply and demand is up for debate but it is clear that Malaysia’s property market has some tumultuous times ahead.

For advice in investing in London, a market with long-term stability, speak to the Benham and Reeves Lettings property team in Malaysia about investment opportunities in London or use our online rental valuation.

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About the Author

Marc has been a board director since 2001 and oversees the company’s rental operations as well as developing new business. He is instrumental in the company’s expansion and works closely with Managing Director Anita Mehra to develop its core services. Read more about Marc von Grundherr here - Read full profile

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