Thursday, 3 May 2018

(NST) Lock, Stock & Barrel: Residential overhang and market cycles

THE Valuation and Property Services Department (JPPH) launched its property market report for 2017 on April 17 this year. This report is essentially a compilation of all sorts of data in the property market throughout the whole country. The book is published each year and is generally eagerly awaited by the members of the property community.

The residential market, as expected, got the most amount of attention, both from the press as well as from property consultants. It was revealed that Malaysia recorded the highest number of unsold completed residential units last year. A total of 24,738 units remained unsold. This represents a whopping 67.2 per cent year-on-year increase compared to 2016.

It was further revealed that the total value of these unsold properties jumped 82.8 per cent year-on-year to RM15.64 billion. These are indeed scary figures. A jump of 67.2 per cent is not small. Something must have gone drastically wrong for such a huge jump to happen in the first place.

Overhang, in this instance, is defined by JPPH as properties that have been completed but have remained unsold for more than nine months after they were first launched.

What are we doing wrong here? Are we looking at these statistics in the wrong way? Could nine months be actually too short a period to expect projects to sell out? How would these same statistics move if the period in question was one year? Surely, in this instance, the percentage of unsold units would drop, but by how much? It would be interesting to see how the percentages rise and fall, if the time was to be adjusted accordingly.

Without having access to those figures, I can only begin to speculate how the market could behave. But I’ll wager a bet that the difference between nine months and one year would not be too significant. Every developer knows that a project sells fast upon its launch before sales begin to plateau and slow down. As such, it goes to reason in this instance that the most number of units would have been sold in the first three to six months before sales begin to taper off and slow down.

It is widely believed that the major portion of this glut is in the RM500,000 to RM1,000,000 range bracket. In the last few years, there have been many launches of properties in this price range. Between 2010 and 2014, there was much speculation in the property market and similarly priced units were snapped up by eager punters. There was a time when it seemed that the thirst for properties would never diminish. No matter how many units were placed in the market, there seemed no shortage of buyers.

Financing was easy and there were various innovative schemes to help buyers purchase these properties. I strongly believe that this demand was actually a false demand which was impossible to continue to be sustainable in the medium to long term.

Then things suddenly changed. The bottom fell out of the property market in a suddenness that caught everybody by surprise. Financing got tough and creative marketing schemes ended. Suddenly, no one was buying. But the building continued for a while more before everyone wised up and decided to stop.

But by then, it was too late. The number of units coming into the market was way more than the number of buyers. And the situation was made further difficult by tough lending policies. Many people couldn’t get a loan to finance their property purchase. At one point, it was largely believed that in order to sell 10 units, you need 20 confirmed buyers because 50 per cent of your potential buyers would drop out due to the unavailability of housing loans.

As the market confirmed to soften over 2015, 2016 and 2017, this overhang situation continued to worsen. The total transaction volume of properties, both in the secondary as well as the primary markets, had been falling since 2012. Although 2014 saw a small marginal rise, this was short-lived. The market continued to contract over 2015, 2016 and 2017.

At the launch, it was revealed that the transactions for the first two months of this year had shown a small improvement over the same corresponding months last year. This is a small piece of good news. Perhaps the slowdown is coming to an end. Perhaps we are at the bottom of the “U” curve now and in the near future, we will begin our climb upwards. The property market is, after all, like everything else, a cycle. We cannot continue to slide downwards. The good times must come back.

Investors out there should not lose hope. The good times will come back. It is my opinion that we are about to experience an upturn in the property market. Get ready for this. Be prepared to take advantage of the current slow market situation. There are more sellers out there than there are buyers. It cannot be difficult to find good deals. And when you do, strike while the iron is hot.

Until then, happy hunting and may the force be with you.

The writer is a real estate practitioner who tries to manage the labyrinth of the property market honestly while consistently maintains a high standard of ethics in his practice. He welcomes feedback via