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The Impact Of The Shrinking Ringgit On Property

The value of the ringgit is a key indicator of how trade and investments are faring in Malaysia. A depreciating ringgit can mean that trade activity is actually slowing down and that many investors are taking their investments out of the country. The ringgit started declining in late 2014 when it experienced its worst two-day depreciation (since the 1997-98 Asian Financial Crisis).

A combination of factors have caused the ringgit’s value to drop of late. Firstly, the global oversupply of petrol has caused Brent crude oil prices to fall to around USD40 (RM172) per barrel. As Malaysia is heavily dependent on oil exports, the collapse in crude oil prices has affected the local currency. The falling value of the ringgit has also been linked to the gradual increases in interest rates by the US Government. Federal Reserve Policy Maker John Williams who gave a presentation to the University of Technology Sydney in New South Wales, Australia says that gradually raising interest rates to bring monetary policy back to normal helps keep the economy growing at a rate that can be sustained for a longer time.”

On home ground, the impact of a weakened ringgit even has a spillover effect on the construction industry, inevitably impacting the whole real estate sector as well. This is because it affects more than just a rise in the cost of materials as other issues and challenges may also negatively impact the industry in the coming years if the currency continues to slide down.

In addition, the weakness of the ringgit will make things harder for Malaysian employers. Some opined that foreign workers now can earn similar wages in their home countries after converting the ringgit to their own currency. 

RINGGIT SLUMP: ARE YOU THE BENEFICIARY OR THE VICTIM?

In retrospect, the falling value of the ringgit has raised several concerns for Malaysians. These days, many new homebuyers also want to know whether the devaluing of the ringgit will affect their property value in the long and short term. Frankly speaking, the effect of a depreciating ringgit can go both ways and affect the property market either positively or negatively.

Cheng & Co Wealth Management Chief Executive Officer (CEO) Ng Chee Yong states that the weakening of the ringgit can result in properties here appearing more attractive to overseas buyers including those from Singapore, Hong Kong and so on. This may result in rising sales from oversea purchasers who have had their eye on the local property market for some time now and are seizing the opportunity to invest in the local market.

Incidentally, he believes that this will also not affect developers’ cost when it concerns the Malaysian property industry so long as they do not use imported goods. Ng acknowledges that Malaysians may feel anxiety arising with the devaluation of the ringgit and may decide to adopt a wait and see attitude by not investing in the property market as they will want to gauge the medium to long term impact on their household income first.

Malaysia Property Incorporated (MPI) Former Vice President (I) David Shieh Chong agrees that foreign investors will be able to benefit from the weakening of the ringgit’s value.

“Most people I believe, will buy based on sentiment and confidence in the overall economy as well as taking into consideration job security and prospects. However for investors, the buying process could be more opportunistic and related to bargain hunting,” says Chong. Tied up with the issue of a declining ringgit is the compounded issue of goods and services tax (GST). 

GST IMPACT: WILL HOUSES BECOME COSTLIER?

On the other hand, the depreciation of the Malaysian ringgit and impact of GST are also justifiable causes for concern. Since the implementation of GST on April 1, 2015, inflation has been on the rise. According to Ng, the Malaysia Consumer Price Index (CPI) rose at 3.9% on a year-on-year basis in May 2017 as per information sourced by the Department of Statistic Malaysia. As such, he opines that inflation will dampen the confidence level of Malaysians.

As further explained by Ng, in terms of purchasing big ticket items including investing in property, it is important for people to have a roof over their heads. He suggests the government could introduce a “First-Home Grant” policy similar to the one implemented by the Australian Government on July 1, 2000 to assist those wanting to buy their first home. In additional, the government he says, should implement more Perbadanan PR1MA Malaysia (PR1MA) schemes that are well-accepted by the market to assist those from the medium and lower income bracket to own their respective homes.

Nevertheless, there are many factors at play regarding property prices which will rise and fall based on the laws of supply and demand. When the demand for property is high, prices tend to rise. Subsequently, when the number of available properties increases, prices will usually drop. Nowadays, the local market, especially the high-end segment, appears to be feeling the pinch of over-supply made worse by the tightening measures on loan financing. 

MORE FALLEN RINGGIT WOES

Interestingly, the ringgit has depreciated about 6% against the dollar since Donald Trump’s surprise win in the US election as the new President of the US last year. It was in fact, the worst hit among Asian emerging markets. Besides interest rates remaining unchanged at 3%, Bank Negara Malaysia (BNM) has also taken steps to restrict offshore foreign-exchange trading to curb the currency’s slide. These measures have helped provide stability for the ringgit, though uncertainties in the global economy, the Malaysian fiscal deficit and the fear of capital controls have resulted in volatility in the regional financial and foreign exchange markets.

The commercial property sector is also expected to remain soft in the next couple of years as it will take time to increase demand for these units with the introduction of new initiatives. Although there is a substantial amount of new supply for commercial properties, most of these purchases tend to be of a speculative nature. Given the importance of attracting foreign direct investment (FDI) into Malaysia to further spur economic growth, the government could introduce more investment-friendly measures to attract such resources into the country via capital gains tax on property to encourage foreign investment.

Despite the property market expected to remain flattish this year, demand from first-time home owners have always been there with affordable houses continuing to gain attraction. According to Jabatan Penilaian Dan Perkhidmatan Harta (JPPH), as of last year, more than 65% of the residential transactions were priced RM300,000 and below. Hence, developers should build more affordable units to capitalise on market demand for affordable homes.

Property market prices have skyrocketed over the last few years as investors, speculators and short-term purchasers have taken advantage of the weak ringgit and market volatility with prices almost doubling in certain locations. In some countries, the real estate bubble has long since burst. So how long more can we see property prices increasing in Malaysia, with many landed homes, condominiums, as well as serviced apartments being priced out-of-reach for most Malaysian citizens? 

OVERCOMING THESE CHALLENGES

Despite much pressure from the current financial situation and the slowdown effect it has had on the property market, developers have yet to show any signs of reducing their prices. Today, even with strong demand for affordable properties, many developers are just maintaining their prices at status quo.

Independent Economist Lee Heng Guie says, “Malaysians are still adjusting to the rising cost of living due to GST, so if the ringgit continues to weaken, consumers will definitely be affected.”

Having said that, the property market could be the main commodity people seek as it offers stability and capital appreciation for the long term. The concept of wait and see does not work for property investment because property prices would go up with time and hardly declines. As more developers are now offering attractive rebates on new launches targeted at the younger generation, it is advisable for first-time homebuyers to take advantage of such offerings as well.

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