I also came across this very good graph’

When I saw it, I immediately thought of this one that shows the US housing prices evolution since 1890.

I don’t know for you, but the similarities between these graphs scare me.

We bought a condo nearly 5 years ago, and I was already thinking that some of KL’s areas were frothy – Mt Kiara anyone ? I have been proven wrong. The market has not only kept going, it has risen at an incredible speed. Some properties have more than doubled in the span of five years, and the number of property gurus organizing seminars promoting their methods and the benefits of property investing followed the same trend, if not worse. In hindsight, I may have been too bearish back then. Still, like most bears, I stick to my guns and believe time is on my side. The bubble may pop anytime now. Here is why.

For one, Malaysia is well past the 75% household debt-to-GDP ratio. To put this ratio in perspective, the UK was at 75% and the US were at 85% before the 2007 crash. If you want to dig deeper into this ratio and its meaning, you can read the following IMF paper by Japelli, Pagano and Maggio published in October 2008 Households’ Indebtedness and Financial Fragility.

Secondly, speculation has never been higher since the mid-90s. Many developers started offering interest-free periods until completion in recent years, effectively absorbing holding costs. Speculators effectively gamble on a price appreciation by buying, holding until the property is near completion, then flipping the property before they need to start paying interests. If you add to this the fact that some banks offer loans to value of up to 90% and sometimes 100%, speculators end up gambling with very little of their own money. This kind of leverage brings awesome returns in good times, but they bring an economy to its knees in bad times – e.g. US, UK, Spain, Dubai, and many other.

These two trends worry me a lot. Especially when I hear investors like the one who was interviewed this morning on BFM, who do not even entertain the possibility of a downside to property investment. That upside-only myopia is the most dangerous of all. The Malaysian property market may have had a good run in recent years, and speculators made a lot of money. But, as the examples of the US, the UK and Spain clearly show, should the market turn around and start going south, the risks to the economy and the country are very dire.

As Andrew Palmer puts it so well in a special report on property by the Economist earlier this year: “Property is widely seen as a safe asset. It is arguably the most dangerous of all”

With only four years behind their belt, they have attracted a lot of interest thanks to their high yields, moderate risk position, and being traded on the BURSA Malaysia exchange directly. Investors who are saving for the long run – ex: retirement or child education – are starting to pay attention and BFM recently did a podcast on the subject.

My friend Y.J. Lim was the guest speaker. Way to go YJ !

Want to know more? You can check the following links:

• Hektar’s FAQ – very comprehensive and well informed
• Real estate investment trust wikipedia page
• Understanding REITs in Malaysia and criteria of a good REIT for investment by Financial Planning Malaysia

For those who don’t know LM, they are a privately owned, specialist Australian income funds manager who provide established income funds with a range of flexible investment options: cash, conservative income and enhanced income. Their funds are on the rise, and their interest rates are quite attractive.

Personally, I am still lukewarm on their funds, but they do seem serious, and certainly do provide good industry reviews for the Australian property market. Here it is:

Whilst Australia is not immune from the global recession, its strong macro-economic framework continues to provide resilience within its general economy and property market, to ensure any recession is short term in nature.

Australia’s population continues to grow, supported by a fairly aggressive migration program which welcomes approximately 160,000 new Australians each year, who immediately contribute to the economy.

Fiscal policy and interest rates

• Since September 2008, Australia has seen a sharp reduction of 4.25% in interest rates, from 7.25% to 3.00%. Loan rates are now the lowest they have been in some 50 years.
• In addition, the Australian Government has implemented expansive and conservative fiscal policy of approximately AUD$60 billion, the equivalent of around 6.00% of GDP. According to the International Monetary Fund (IMF), this gives Australia’s government “scope to counteract the downturn”.
• The resultant Australian Government debt created by these expansionary policies will be subsequently less than experienced by other economies. Australian Government debt as a percentage of GDP is forecasted to be below 20.00% in 2014, compared to close to 80.00% for the UK, US and Euroland, and Japan at 140.00%.
• There have been NO government bailouts required, unlike the UK and Europe where massive bailouts have been required within the banking and corporate sectors.
• Australia’s banking sector is strong, with its four major banks each holding one of only 12 worldwide Standard and Poor’s AA+ ratings.

Funds management industry and financial services sector

• Australia has one of the largest and most tightly regulated funds management industries in the world.
• As part of the managed funds industry, the financial services sector is the fourth largest sector in Australia.
• Australia’s non-bank sector is well established and recognised. It constitutes approximately 35.00% of the financial services sector.

Property

• Australia’s property market is diverse and ranks in the top 10 globally.
• Australia has the second largest REIT (Real Estate Investment Trust) market in the world, after the US.
• The continuing housing shortage faced by Australia is being addressed at both Federal and State Government levels. Both are currently spending AUD$ billions on infrastructure to combat unemployment, and to provide the necessary framework for continued growth. The Federal Government currently provides a grant of between AUD$7,000 to AUD$21,000 to first home owners.
• During 2008, Australian property prices softened around 2.00% to 3.00%, with further marginal softening occurring in the first quarter of 2009.
• Sales activity is slow and there has been no volume of discounted sales, a result of the current environment of record low interest rates.

Traditionnellement, le retournement du cycle de crédit et son corollaire, la correction immobilière, s’engagent dans le sillage de la remontée des taux d’intérêt voulue par les banques centrales pour calmer la surchauffe économique. La faiblesse conjoncturelle et surtout la remontée du taux de chômage qui s’en suivent sont les éléments déclencheurs de la remontée des taux de défauts dans les bilans bancaires. L’ensemble alimente en retour l’inflexion cyclique cotés crédit et immobilier.

L’ajustement immobilier américain en cours depuis la fin 2005 a en partie défié cette séquence logique puisque le sens de la causalité s’est surtout déployé cette fois-ci du marché immobilier, avec la vague de défauts sur les crédits subprime, vers le reste de l’économie.

L’effondrement du segment très risqué du subprime confère ainsi une certaine singularité au retournement du marché immobilier américain.

Néanmoins, des booms ou des bulles immobilières se sont développées un peu partout dans le monde et leur arrivée à maturation est synonyme de correction, y compris en Europe. Ces ajustements seront de facture plus traditionnelle, en ligne avec le retournement conjoncturel, même si le degré de sévérité sera à la mesure des excès commis durant la phase ascendante.