For many people, buying a house means tying one's self to a monthly mortgage repayment for the next 10, 15 or perhaps 20 years. Houses are expensive items, and in a volatile market, a slight up or down swing could mean a difference in price of tens of thousands of Ringgits. The research team found that when prices are rapidly moving up, the waiting game could mean that one will end up paying much for a much higher price. When prices are dropping, one may suffer similarly if a property is bought too early.
Logically, this is now the period to consider buying.
Timing can have a great impact on the value of the purchase. However, it could be difficult working out the right time to buy a house in a volatile market. In this second part of the article, the research team will proffer some suggestions on how to identify signs for home buying in the context of the current environment of the Malaysian housing market. These suggestions are based on their statistical findings/results obtained accordingly and the application of conventional wisdom.
The Malaysian housing market was experiencing an almost unprecedented price growth over the past few years. It was only until around 2013 that prices appeared to have stabilised. As home prices spiralled higher, people are beginning to wonder if the local housing market is in a housing bubble which is ready to burst. Nevertheless, housing price index data suggests that the market is not on the brink of collapse. But logically, what goes up must come down and vice versa.
Using the year-on-year increase in housing prices, a movement of housing prices over the period of 1990 to 2016 was tracked using a simple graphical method, followed by a statistical algorithm for the verification of the results. Not only are the results traced out in Figures 1 and 2 supportive of each other, they are in line with the historical records.
Results in Figure 1 uncovers 2 past episodes of the housing bubble in the domestic market for the period 1990 - 1993 and 1994 - 1998. Housing prices were on the uptrend between 1998 and 2000 and thence hovered within short range until 2009 when price growth accelerated again, reaching another new high in 2013 when we observe the turnaround in price movement. Between 2009 and 2013, housing price expansion points to a bubble-making period. The ensuing years from 2013 saw the downturn in economic conditions both within and outside the country which negatively impacted the housing market.
With careful observation, the interaction of the various market forces and factors as described in the first part of this article has brought about the reversal in direction of the housing price movement, while also providing a buffer that allows gentler price drop. The graph in Figure 1 suggests that the housing market has already entered the downward slope of the current cycle and up to now looks relatively stable, reflecting the supporting efforts of the government and housing suppliers.
Based on research carried out, now is the time to consider buying. However, there is still a possibility this trend is just an intermediate short cycle or the downward momentum of prices could increase further in favour of buyers.
The next step is to look for vital signs in the market that favour buying activities. It is believed that monitoring and logical analysis of certain economic and market events could impact the housing market.
Suggestions for interested home buyers...
#1: Property price cycle crossed the peak at 2013 and is on a gradual downslide. This phenomenon is a vital sign for us to enter the housing market. The question is: when shall we enter the market? It is known that then the cycle is on the downside, house prices generally will be lower than the normal levels. Statistical testing results in Figure 2 show that for the period 2009-2016 the housing market is theoretically in a bubble. However, practically, it is a price cycle which has peaked, so there is less likelihood that house prices will go up further unless there is visual sign that it is on the way to follow a "U-turnâ€, however, gradual it might be.
#2: Advertisements on residential properties for sale are pervasive and offers are sweetened with rebates and incentives. It's a basic indication that the housing market has excessive inventories. This reflects a sluggish market and that sellers are trying to clear existing stock. Recall that in the first part of this series it was reported that developers will hold back or slow down on new projects when profit margins are not workable. In addition, constrained by rising costs, there is a limit in lowering prices. During an economic downturn, weak and smaller developers would likely be forced out of the market and thus easing market competition. Therefore, when the backlog is cleared, prices of new home supply are not expected to be cheap. Supply squeeze may cause prices to go up instead.
#3: Expect a surge in housing prices when the economic growth starts to improve. This is the time to purchase a home. In an already weak market, when positive news starts to surface reporting of encouraging growth rates, business expansion, and forecast of some buoyant economy, employment and earnings will rise. With the improvement in the economy and the job market, increase in demand for housing and a corresponding housing price hike will certainly follow. So, when the media reports about how rosy the economy is getting, it is a good time for real estate investment. When the economy climbs back in full steam, the housing market may have entered the next cycle.
Reports from sellers indicate that the market is now basically being supported by first-time home buyers while the government is taking an increasingly active role to help this segment of buyers with various financial plans. In addition, there is the recent report of the rising number of abandoned projects and mounting housing inventories in the country. These are signals that the local housing market has lost its vibrancy as well as any speculative fever and government incentive is needed to help maintain market resilience.
Recently there appeared some bright spots for the Malaysian economy. Firstly, oil prices have picked up, trading well above $50 USD per barrel. Secondly, there is the report of China's significant increase in investment and participation in Malaysia, specifically in the East Coast Rail Link, Melaka Gateway Project and Bandar Malaysia as well as their keen interest in the KL-Singapore High-Speed Rail.
When the effect of these development projects on the economy kicks in, excluding the changes in the local political scene, the market is expected to start improving by the first quarter of 2018. But as it stands, the current market scenario seems to suggest a ‘buy' signal.
NB: The suggestions in this article are based on the present housing market scenario in Malaysia. The authors wish to remind readers that these suggestions are not meant to be taken as an absolute factor on working out the right time to buy a house. This article is part of an ongoing research under FRGS grant from the Higher Ministry of Education. The members of the research team are: Yip Chee Yin (team leader), Choong Chee Keong, Au Yong Hui Nee, Abdelhak Senadjki, Woo Kok Hoong, Tan Yan Teng and Ahmad Nazri bin Wahidudin.