GST, SST & The Potential Property Bubble Burst
I remember when the Goods and Services Tax (GST) was first about to be introduced here. A good friend told me that he was rushing to buy a property because his real estate negotiator friend told him that property prices would jump up by six per cent following the GST. I then asked him if he liked the property that he was about to buy and he said “Yes”. I responded by telling him to proceed as my advice was for him to stop the purchase if he did not like the property enough and was buying just because he was worried about the potential price increase due to the GST.
And now, we have the upcoming Sales and Service Tax (SST). Should we start to worry and quickly buy items first since the SST is likely to be 10 per cent? Would property prices go up by 10 per cent then? If we google for information on this, the general consensus is that property prices will not be rising by the same percentage or even at all.
However, let’s not debate about this because it is not the main issue, really. Assuming we are buying a home for our own stay, then we will usually be staying in it at least for the next 10 years. Hence, the SST would only be one per cent per year when averaged out. This is assuming it is a full 10 per cent impact on the property price. Then, should one be buying for investment purposes and taking into account the Real Properties Gains Tax (RPGT), the 10 per cent SST will be spread over six years which would only amount to 1.5 per cent or so per year. Looking at the usual price increase on a yearly basis would tell us that the SST is really a non-issue.
Therefore, only buy the property once you have considered all the pros and cons. My advice is not to buy or not buy a property because of the SST as property investment is for the long term. Beyond just the GST and the SST, we recently also saw a frenzied sharing of news prediction concerning the potential property market bubble bursting.
However, is this really happening? The main reason stated was that property prices for luxury properties were already too high and thus, a readjustment is necessary. The government should thus allow it to happen and take steps to prepare for this “crisis”.
Allow me to share a few key reasons why the property market may burst and, this is not just about one segment of real estate.
The first assumption is that we are not overstretched currently due to property mortgage payments. Now, let’s look at the three main signs before a property market would burst.
#1 – Sharp & Continuous House Price Increase
Property prices must be rising at a much faster pace than our salary growth and for many years. Remember the periods of 2009 – 2013 here in Malaysia? Yeah, prices were generally going higher every few months! Then, the cooling measures from Bank Negara Malaysia came. The speculative activities were then minimised instead of being the norm. Speculators were pushed out of the market as they would then need to put down a 30 per cent down payments with banks only lending to qualified borrowers. The double digit house price growth was stopped in its tracks. When we ask our real estate negotiator friends these days, they will usually tell us of certain potential buys which are now “Below-Market-Value (BMV).” Of course, we should still be aware that BMV here does not necessarily mean a good buy unless the BMV was not due to the BMV-level price previously.
#2 – Affordable Choices Have All Disappeared
This is an extremely important factor. The B40 and the M40 households in Malaysia comprise 80 per cent of total households. They need affordably priced homes and not the RM500,000 or higher priced homes. This is the reason for the PR1MA, Rumah Selangorku and even RUMAWIP affordable housing projects – with more affordable homes on its way. The government states that it intends to build one million new affordable homes within 10 years. Of course, we hope these affordable homes will be in well-connected areas, are comfortable to stay in and built as per the announced timelines. Once these happens, the pressure on the housing market will be lessened because property transactions would continue to happen instead of only the rich having the money to buy and the poor struggling to get a place or having to rent forever. The property bubble will burst when there are too few affordable choices in the market. Currently, there is also the secondary market which will provide choices under the sub-RM400,000 category.
#3 – Healthy Banks with Low Non-Performing Loan (NPL) Numbers
Banks in Malaysia are listed on Bursa Malaysia. They publish their quarterly results without fail so take a look at their Non- Performing Loan (NPL) numbers. If we see a spike in the numbers, we know that the borrowers of the banks are no longer able to serve their debts. What this tells us is that the potential for the properties to be auctioned off is high and this is usually the start of a loss of confidence when the herd mentality kicks in. More people will be looking to sell their properties at lower prices and then, a crisis starts. The image shows the NPL numbers by CEIC.com.
In brief, the only reason why people start to miss their payments may be because they have lost their jobs. This is why this number is extremely important to take note of and everyone should!
By the way, there will be no such thing as an impending property bubble burst should all these three signs remain healthy. Who knows if another global financial crisis would unfold in the near future which will pull all the rest of the world into a recession?
Based on the current numbers, Malaysia is unlikely to be the starting point for the crisis. This is what Finance Minister Lim Guan Eng said not too long ago:- “Economy remains strong, fundamentals solid.” I do not think his assessment could suddenly change for the worse.
Beyond these three major signs, we can also look at the unemployment rate in Malaysia. Any sudden spike would indicate problems ahead. Also, usually, when car sales numbers are lacklustre, one can envision that something bad is about to happen. Shoppers go to popular malls so when people have lack of money, they do not go to places where they are tempted to buy.
One should also note that when a crisis does happen – like the few times before this, property prices will drop because of negative sentiments. However, once the economic recovery starts and negative sentiments turn positive, property prices would recover and will usually be higher than before. Five years ago, we could afford a RM400,000 property. If property prices did not increase crazily and had stayed almost at the same level, then after five years of salary increments, the property price we could afford could be RM500,000. This is the real reason why property prices could go up. If we could not afford to pay any higher, it will stop going up. Developers will just adjust what they build accordingly too. Happy understanding and investing.
BY CHARLES TAN
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