SOS Malaysia Property

A friend asked me, principally for Klang Valley properties, are there a BUBBLE?

Lets look at some of the latest launches (year 2010):

Mutiara Damansara - RM650 psf (near Tesco & Curve)
Icon City (Mah Sing) - RM650 psf (near Motorolla, Jalan 222)
Icon Residence (Mah Sing) - RM1100 psf (near Mont Kiara, towards Segambut Dalam)
Terrance house near Taman Megah - about RM650K
Condo near Plaza Damas - RM600 psf (within Sri Hartamas)
Service apartment at Solaris Dutamas - RM650 psf (near High Court Jln Duta for small units 700sf)
Condo at Tiffany iZen (Ireka) - RM650 psf (smaller units, near Solaris Mont Kiara)
Verse (Alan Tong) - RM850psf onwards (for smaller size, inside Mont Kiara)

All the above are new launches except Solaris Dutamas and Tiffany (delivered for up to one year)

So, looking at this pricing, is there a bubble.

How do we identify bubble, is it sustainable?

FUNDAMENTAL ANALYSIS

1. Price and Household income (averagely around 3-4 times - consider reasonable valued)



2. PE (inverse of rental yield) - average between 3-7% (depends on landed or condo)



3. Occupancy rates of most condos



4. Average area per household and its demand yearly vs total supply in sf each year (to evaluate whether many excess units)

OTHER ANALYSIS

1. Liquidity



2. Interest Rates



3. Government policy on capital gain or foreign requirement



4. FDI



5. Sentiment (Optimism)

MyView

Based on both analysis, the first one is the Fundamental analysis, which will reflect HIGHER or LOWER than Average for many years (Benchmark)

But, it is the subjective factors that result in the property market to be over valued or under valued (as against benchmark) for a period of time.

A simple example which is exactly happening in major cities of Australia. The average housing price per household income has increased from 2.5 times to about 8.5 times (2000 to 2010). Technically speaking, the benchmark is say 3-4times, hence, overall, property in this major cities are OVERVALUED, but it has been sustained for almost 3-4 years. The main reasons may be due to the subjective factors, i.e. liquidity, interest rates, sentiment, confident, government policy on property, FDI etc.

For USA, it is driven mainly by low interest rates, and innovative scheme that encourages purchase and non stringent credit evaluations. The main culprit is actually liquidity (easy excess to debt), and positive sentiments. BUT many has forgotten to look at real DEMAND & SUPPLY, many units are bought for speculation purposes. When the market takes a turn, all debt driven assets DEFLATE. Very simple, when FEAR takes over, and actual fact reveal, there are more UNITS than actual real demand. Instead of property is purchased for staying, it became a commodity for GET RICH QUICK SCHEME. When the MUSIC stops, ..... the price COLLAPSED because the truth is, supply exceeded real demand substantially, period.