NOVEMBER 20 - In its address to economic and financial developments in 3Q 2017, Bank Negara Malaysia has pointed out that there is currently a property overhang in the market, with 130,690 unsold units as of 1Q 2017. Out of the unsold units, 83 percent of which belong to the above RM250,000 price range. It is also notable that 61per cent of the unsold units is high-rise apartments.

The overhang shouldn't come as a total surprise to many as Malaysians have long been complaining about the skyrocketing property prices over the past few years. The increase in property prices is due to speculative investing as well as the surge in a number of developers jumping on the bandwagon for the past few years, whereby government's and bankers' responsibility cannot be absolved.

The phenomenon of property glut prevalent today did not get better despite many developers' efforts in pushing sales which include rebates and lowered down payment.

Another main reason that has contributed to property overhang today is the badly impaired purchasing power of the people. No further explanation needed for anyone to understand the dire economic situation Malaysians are in right now. O&G crisis, GST, ill-performing Ringgit, bad market impression due to financial scandals and persistently increasing unemployment rate have drastically reduced market activities and people's disposable income.

Complemented with the rising property prices, many were left with no choice but to turn to affordable housing or simply stick to renting. This explains why properties over RM250,000 became unattractive and unaffordable to many - people simply can't afford them!

What are the potential effects of property overhang to Malaysians? Is this a temporary issue? Does it lead to other issues? Can we solve the problem by reducing the interest rate, lowering down payment, or making financing easier to people?

All completed but unsold units, regardless of the margin imposed, will eat into developers' book due to depreciation and their continuing obligations to financiers. Naturally, without sales, developers have the tendency to lower property price to match market's demand. This could potentially damage neighbouring properties prices, irrespective of how much were the property priced inflated in the first place.

Another more likely immediate outcome is for developers to hold on to unsold units because it is developers' instinct to resist sharp discount when holding cost is manageable. But if the situation persists, developers will soon find it difficult to service its finance cost and face cash flow hiccups.

Another time bomb that's ticking is a potential panic dumping of properties when the sellers from secondary property market cannot or decide not to hold on to their property any longer.

While property prices are generally downward resistant, speculative investors who are profit-oriented are inclined to dispose of off their units when they expect a downward trend of property demand and prices within their portfolio timeline.

These could lead to a spillover effect on the property market and potentially be disastrous to Malaysia's financial market.

What's oversupplied is not properties, but in fact expensive properties. The supply of properties that are affordable to people still does not match the demand. According to Khazanah Research Institute and Bank Negara Malaysia, the sign of well-functioning affordable home market when the median price for the housing market is three times the gross annual household income. At a median monthly household income of RM5,228 in 2016, what would make a house "affordable” is a price range of around RM188,000, way below the price of most property units especially in Klang Valley. While affordable houses are being built, careful implementation of financing scheme and timely completion of construction should be prioritised.

Traditionally, efforts to ease the loan application or criteria for foreign property buyers to purchase properties in Malaysia will be done. However, what's more, important is that the government must treat the cause rather than the symptom.

The government must realise that to solve the oversupply of the property is not to source for buyers to buy the unsold units but to address the issue that our people cannot afford to own a house with the current economic state and income level.

The pricing of properties as well as the sale of properties to foreign investors should be placed under greater scrutiny so that it does not result in the ballooning of property prices. As mentioned earlier, property prices are generally downward resistant - even when there is more supply than demand. In the property market, the rule of supply and demand does not really apply in the way we expect them to.

What happens in reality is that if property A costs RM500,000 today, and a developer decides to build property B that is largely similar next to property A and prices it at RM600,000, price of property A will adjust upward accordingly, regardless of whether all units in the project property B belongs to are sold out or not. While pricing mechanism of properties is based entirely on developers' decision, marketing strategy and market perception, the government can play a greater role in regulating the cost and margin, as well as discouraging speculative purchase (and speculative building).

To complete the picture in solving oversupply in properties, what must be discussed is the demand a.k.a people's purchasing power. It's not enough when the government keeps telling the people that Malaysian economy is doing well and that GDP growth is encouraging because for a matter of fact most Malaysians are struggling to make ends meet every day.

When wages and salaries are almost stagnant for the past decade while prices of commodities are going up, people's anger cannot be contained by words of affirmation from the government. Not only the increase in property prices but almost everything is outstripping the growth in the real income level of many Malaysians.

It is time for the government to look into policies that can improve people's wealth and purchasing power, rather than make it easier for people to incur more debt just so unsold properties can be taken up at the expense of even more expensive properties in the future and more Malaysians who cannot afford to own a property.