When home prices rise too quickly?
When home prices are rising VERY fast, what could central banks do? Well, they could issue 'responsible lending' guidelines to all commercial banks. Then, the lending will be more conservative and only to people who could almost all the time, pay their loans. They could also raise interest rates. Wait a minute. Home prices are up and the interest rates are raised? Yea, raise rates when home prices are up. The reasoning behind is that when interest rates are raised, mortgage rates go up and people will think twice about buying.
Super high mortgage rates?
Imagine 14% of home loan rates across all banks. Will you still be buying that dream home or delay a bit? Low rates meanwhile may encourage home buyers to buy a home because they do not want to buy only when the rates go up. 14% was a real rate for Malaysia, yeah but that's in 1984. Now, let's look at Australia's Sydney and Melbourne.
Article in edgeprop.my here. According to leading property analyst CoreLogic, home prices in Sydney and Melbourne fell 11.8% and 12.6% respectively for the past one year. There is now speculation that there will be a pre-election interest rate cut. AMP Capital chief economist Shane Oliver said, "Ongoing home price falls will depress consumer spending." The Australian economy grew just 0.2% in Q4 2018. Wage growth remained soft and inflation is below the central bank's target. Due to all these, analysts are predicting up to two quarter-point rate cut within 2019. The first one is predicted to be as early as next week, ahead of a May 18 election. Oliver added, "An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed around four months after the first cut."
Meanwhile, a cooling housing market meant the profits of banks drop too. Australia's ANZ bank, posted a 5 slide in half-yearly net profit to AUD$3.2 billion (RM9.28 billion). ANZ Bank CEO Shayne Elliot said, "Home loan demand in Australia has slowed significantly and this continued during the half." He added that the bank had taken a more "risk-averse" approach in the wake of a damning royal commission into the banking sector, which had seen it "step back" from some segments, contributing to the losses.
A familiar situation in Malaysia?
Economic growth predictions have been coming down. From Finance Minister Lim Guan Eng's prediction last year of 4.9% for 2019 to BNM's recent estimation of just 4.3% - 4.8% for 2019. Earlier article here. Salary growth, as usual, is always said to be the 'slowest in the world' every year according to many of my friends. Statistically, it's more like 3-6% per year depending on how much our employer appreciates us. If they paid too low, some other company gets our services instead. Inflation numbers thus far have been low, I mean it was even negative for the first 2 months of 2019! Earlier article for reference here. Deflation vs Inflation. The only one thing we may not have is the double digits falling home prices for the past one year for the two major property markets in Malaysia; Kuala Lumpur and Selangor.
When median prices become unsustainable
Do not think too much, if the median property price vs the median household income becomes unsustainable, the prices will fall. Else, we will face a potential property bubble. As for those who believe that Malaysian property prices are already much higher than the rest of the world because our salary looks like the lowest in the world, think again. Read more. We could certainly heave a sigh of relief. Bank Negara Malaysia has been pretty pro-active in the market and the transactions have been slowed down since 2013 and not only happened in 2018. Besides, every other day we read in the newspaper that home loans are the real issue why buyers are unable to buy? Here's one latest article for reference. Buy within affordability and the market will correct itself without the need for too much intervention. Happy investing. (not speculating)