A possible property bubble caused but the pandemic!

“2020 Pandemic Adaptive” Property Market: Realistic or Just A Fascinating Dream?

The world has gone through several property market crashes in the past 50 years, none of them, though, has been “pandemic-fated” and should be compared to the current one! But, wait a moment, are we in a property market crash or bubble bursting situation?

The Economist Intelligence Unit has clearly stated that: 

“It may take more than the deepest downturn since the Great Depression to actually shake the housing market’s foundations”

Property market crashes have always been, historically, driven by speculators whom, after entering the market at very favorable conditions, high demand low supply, massively left it to realize their own gains causing an overwhelming wave of “on-sale” properties, high supply low demand!

Call it “Property Market Crash 101” but in few simple words this is as simple as it is!

Are we, in Malaysia, even near to such a market scenario? In my humble view not at all as the Malaysian financial authority, namely Bank Negara Malaysia, has been curbing property speculation since long and we didn’t witness any massive sale off of properties for quite some time, even during this pandemic.

This graphic shows, in an undeniable way, a drop of the property transactions’ volume with their values holding or showing a minimum decrease. 

Of course, we cannot deny it, there are some areas and type of properties where the supply has been absolutely overwhelming compared to the demand.

Good examples are KLCC area where occupancy rates of residential properties have been falling for several years in a row and, Iskandar Malaysia, in the state of Johor, where property development has been running ahead of economic growth in terms of several years and thousands of “un-demanded properties”. 

The Future Scenario

All the above, unfortunately, should be looked at as history. The world or the way we thought of it, for the first time since 1919, has been and is threaten by an unprecedented pandemic, Covid-19, which is radically reshaping our economies and way of living and working we all were used to. 

Though, the housing market has not been the trigger of this economic downturn, investors and homeowners have started bracing themselves for the worst as it became clear that the pandemic would push the world economy into its deepest downturn ever.

Keep on walking in uncharted territory, house prices picked up in most middle- and high-income countries, in the rich world they rose at an annual rate of 5% and, even, some markets have start experiencing a bull run. Germany saw its house values 11% higher than the year before and same goes for South Korea and parts of China. 

Let’s have a look at what, in my view, have been allowing, and hopefully will keep to, this unusual market behaviour? 

Monetary policy

Bank Negara, as most of the central banks around the world, has heavily cut policy rates reducing the cost of mortgage borrowing. Some borrowers, the ones with healthy financial background, can now afford to take up bigger mortgages.

Others find it easier to manage their existing loan repayments. Investors with spare cash at hand, are willing to invest more in property, because yields on other assets have dropped and the share market appears to be highly unpredictable. In few words, property has raised its appeal and is sexier than before. 

Fiscal policy 

In the past recessions, as people lose their jobs and their incomes fall, foreclosures heavily pushed house prices down. During the early stage of this pandemic though, many governments have enforced substantial helping policies to preserve households’ incomes.

Handouts as wage subsidies and real financial support and grants to all industries have been introduced by most economies worldwide. In Malaysia the government and BNM have adopted measures to directly support the housing market allowing borrowers to firstly suspend their mortgage repayments for 2 quarters and then renegotiating the terms of their loans once the two quarters “payment holiday” ended in September 2020. 

Changing consumers’ habits or preferences

In 2019 households in Malaysia and most SEA region countries, devoted 14% of their spending to housing costs. With an estimated 53% of office workers, since when the Covid-19 pandemic has started, working from home and a boosting of online businesses, many potential house buyers may want to spend more on a nicer place to live and the market has shown evidence that people are thinking of upgrading their dwellings.

They are looking for more space, with better soft infrastructures and not necessarily nearby the city centre. Suburban properties, say within a radius of up to 40km from the city centre, have been searched and are currently experiencing a higher demand.

This is happening not only in Malaysia and the SEA region but even in New York and San Francisco people are fleeing cities for the suburbs. Data from Zillow, a housing marketplace, suggest urban and suburban property prices are rising at roughly the same pace as before pandemic while price growth in the highly priced CBDs and city centres is actually slowing down.

People are looking for bigger houses near where they already live, suburban areas, and for the ones residing in or near the city centres, the hunt for bigger living quarters has expanded towards the outskirts.

Strategic factor of this shift of preferences has been boosted by the faster digital transformation of the Malaysian developers to offer a safe digital and tech buying experience for all buyers. Plenty of “pandemic proof” solutions in this regards such as virtual or augmented reality, digital property sales booking system, keys handing over and defect management systems or even community building and communication systems.

In conclusion, yes I am not expecting a property market crash but few small intensity and not disturbing market adjustments with a good recovery starting already in the second-third quarter of 2021. 

There is nor right or wrong and above are just my 5 cents of ideas and discussion points, leave a comment below keeping in mind that is perfectly right to agree or disagree. We’d like to hear from you!

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