Moves to cap property prices could backfire
Imagine if a regulatory body decided to limit the number of durians purchased by each individual in order to lower the price of durians so that everyone would have the chance to taste the King of Fruits. What would happen?
If this campaign was successful to the point that prices fell to close to or below production costs, durian planters and sellers would rather walk away from their plantations and let the fruits rot on trees than to harvest the fruits, transport them to towns and sell them at a lost. Economics 101 tell us that when supply reduces, price increases.
This is what’s happening in the property industry especially in Asian countries today. As a developing and booming region, Asia has seen lots of activities in the property industry in the past 10 years.
The housing price increase in this region is also more significant due to rising input costs, strong economic conditions and growing populations.
To prevent the property prices from surging further due to growing demand and worldwide quantitative easing (money printing) government policies, several governments in this region have introduced various “cooling off” measures with the most insistent being China, Hong Kong and Singapore.
In China, the State Council stepped up a three-year campaign to “cool off” home prices in March. Measures included raising first-time buyers’ down payments from 20% to 30%, and second-home buyers’ down payments from 50% to 60%, and ordering stricter enforcement of a 20% capital gains tax on sales. The government also limited home purchases in certain areas, tightened credit-quota limits and raised benchmark lending rates.
However, according to a recent report by the National Bureau of Statistics (NBS) China, residential and commercial property sales totalled 3.34 trillion yuan (RM1.77 trillion) in the first six months, jumping 43.2% compared to a year earlier.
The pace of China’s year-on-year home price rises in April, May and June was also the strongest this year in spite of the March initiatives. Average new home prices in 70 major Chinese cities climbed 0.8% in June from the previous month based on data released by NBS. New home prices rose 6.8% in June compared to a year ago, the sixth consecutive rise and the fastest pace since January 2011.
In Hong Kong, the government introduced a series of steps to curb prices since 2009. Its measures included a 15% property tax on foreign buyers, mortgage restrictions and taxes on quick resale.
The government also limited the maximum term of all new mortgages to 30 years, and mortgage payments for investment properties could not be more than 40% of the buyers’ monthly incomes, compared to 50% previously.
According to a Knight Frank report for the first quarter of 2013, property prices in Hong Kong were 28% higher on average, compared to one year ago despite measures to “cool off” escalating prices.
As for our neighbouring country Singapore, the government just unveiled its eighth round of “cooling off” measures in June. The new rule states that home loans should not exceed a borrower’s total debt servicing ratio of 60%. Lenders will also be required to deduct at least 30% from all variable sources of earnings, such as bonuses, and rental revenue when determining an applicant’s income streams.
Prior to this, the Singapore government made seven attempts to cool off the residential real estate market since 2009. In January 2013, the government implemented an extensive round of tightening measures by imposing higher stamp duties, lowering loan-to-valuations for mortgages, and implementing stricter rules on permanent residents (PRs) buying their first home.
Nevertheless, despite a series of “cooling off” measures, Singapore private home sales in January 2013 continue to hit a high note, with a 42.8% increase from December 2012, and a 7.5% increase year-on- year.
In our home country, the Government has also introduced a number of “cooling off” measures.
These include the 70% loan policy for third property purchases, requiring the housing loan limits calculated based on net income instead of gross, and the loan tenure reduced from 45 years to 35 years previously, etc.
The “cooling off” measures introduced in various countries are believed to have some impact when they were first implemented, however the overall effectiveness has yet to materialise.
While we understand the good intentions behind these measures, they result in further heating up of the market because the fundamental issue of the shortage of affordable housing is not addressed.
There is fine line between “cooling off” and heating up the market, when the market is having a strong, genuine demand. “Cooling off” measures will constraint supply, and when demand is higher than supply, the prices will eventually increase.
In Malaysia, according to NAPIC, there is only a supply of about 100,000 new houses a year throughout Malaysia, while the demand in Greater KL alone is projected to be an additional one million units if Pemandu achieves its target of increasing the population from six million to 10 million by 2020.
Therefore, if our authorities are pondering further “cooling off” measures, it is beneficial to look at the real experience from other countries and not just the “short term” effects, the different environment of property development in our country should also be taken into account.
The original intention of controlling the price of durians in my earlier story is to allow more people the chance to taste this unique fruit at an affordable price.
However, such good intentions often backfire and worsen the current conditions. “Cooling off” could eventually lead to heating up!
FOOD FOR THOUGHT by Alan Tong Kok Mau | feedback@fiabci-asiapacific.com
Property developer and group chairman of Bukit Kiara Properties Datuk Alan Tong is also FIABCI Asia-Pacific regional secretariat chairman.
Source: StarProperty.my
Very interesting article indeed, comparing homes to durians! If you don’t have a roof over your head, you could get all wet and fall sick after a storm. Your family can’t have a proper place to live, eat, study and rest. I think not having the chance to eat durian would hardly result in such predicament. That is why governments in many countries take it as their responsibility to make sure the people have a place to stay, whereas i have never heard of any durian entitlement policy…..:)
So when Mr Tong mentioned that durian planters would walk away when price is depressed, as if developers would walk away when they don’t make enough money, I’d say so what? It’s the same for any business, operators quit when they can’t survive to the extend that when enough of them quit, price would rise again, then you have players coming in again, until such that equilibrium is achieved.
If anyone is having difficulty understanding that concept, just imagine an apple hanging on a spring. Pull the apple a little, it will start to oscillate above and below the equilibrium point in a sinusoidal fashion and slowly converge to the equilibrium point and stop.
Now if you hold on to the apple and keep pulling (in property terms, you have people keep buying house for speculation with easy credit and foreign currency), the spring will keep extending in one direction until it snaps!, instead of oscillating to equillibrium….:)
There are many flaws in Mr Tong’s reasoning in the article, but I’d have to agree with him that any measures implemented by the authority should have a long term view. However, a measured and well executed cooling-off policy could be a good precautionary action before a well rounded long term policy is discovered (if we ever discover it)….:)
Backfire is good!
Excellent!
Alan Tong is an ignorant lot….. in simple words….(Silly)
If you are on the ground (taking Penang as example)
Now there is obvious over-supply of condo/apartment. Be it mainland or island.
This fenomena is not new……… Banks are starting to tighten loans.
Prices of Primary or secondary property are almost at its Peak. So many genuine buyers can’t even afford to buy property anymore.
Economy are bad overall. Malaysian latest GDP didn’t achieve its projected target. Malaysian Government debt keep on increasing and Ringgit value have weakened.
So how many people are going to buy property when they don’t even have income that is sustainable for them or qualify them to own a property.
When I go and survey around at mushrooming apartment project in Penang Mainland, so many new project either wanna sell or can’t even fully sold.
In Penang Island, I check Property Guru website, suddenly so many landed house are up for sale. Here I meant the good area property like Sri Nibong, Island Glades, Green Garden. All this landed houses were fully renovated and selling at RM950 to RM1.25Mil….. Interesting part is some are even NEGOTIABLE. If you turn back times, e.g 6 months ago….such property with proper renovation are rare. Only memory that I have is old rundown houses were the one selling at that time. Good e.g is a double storey sri nibong selling for RM1mil++.
I sense the desperation is there. Fear and Greed……If you are smart and have the money, just wait and see who burst first. You or developer or THe so called Greedy Property Flipper.
@Micheal
you read my mind, well said…
Alan Tong is just telling us the fact in other countries. Why is he silly?
You have to understand, property prices does not boom at the same pace for all area.
Some area like The Light, E&O Tanjung Pinang, Tropicana Penang Water City, and Mahsing’s Southbay..these are the main developer’s project that drive the price.
Secondary market around this area will be the follower.
Those area that you see with a lot of supply, it will be just a matter of time before they start catching up the price.
I agree that some area, prices is too high and transaction is moving slow. But i see another big price adjustment is on the way..especially around Jelutong area. Light linear transacation hit above 700psf, and collection is just going to higher in the secondary market.
i fully agree with you Mic, see the Economic forecast growth go down below 5%,
Many property cannot be sold out, according to one of property agent told me very difficult to find buyer nowdsy for secondary property, factory not doing well, business affected,,,,,what will happen to property market if secondary property price go down while new property with better design /small sq ft price keep on increasing, but our ringgit value became worst.
@Micheal
Very obvious evasion.
He on everywhere else after talking about cooling off measures gave the exact statistics on house sales on recent months.
Except “our home country”.
It’s a terrible write up.
Just have a dinner with old friends, 2 of them purchased straight quay and one purchased Fettes residence, all price beyond my 2 storey landed. We have a good chat as all are having renovation. Am thinking, is economy that bad now? But price of house is terrible nowadays.
@Roti Boy,
When you said “price of house is terrible”, you mean what? Price going down? Can’t sell? or what?
Condos that are pricier than landed homes have been around for a long long time. Why has that surprised you?
Mr Tong is a developer and a chairman of a development company…
So he is writing an article trying to con people into buying properties that he can’t currently sell… Talk about self serving interest…
Everything he is saying is true… but the problem is that he doesn’t understand the cause of the increase in property prices… Nothing to do with having or not having “cooling off” measures introduced by the government… but every thing to do with the availability of easy cheap credit for the speculators to speculate on property…
However now all the cheap credit is getting harder to get (foreign money fleeing all these countries including Malaysia)