It Is Time To Go Fishing (for Property?)

On 23 April 2014 there was a piece of news about Malaysia property market, based on the Property Market Report 2013 released by the Valuation & Property Services Department:

“ Property Transactions Dip, But House Prices Continue to Rise”

The first line of the news: “The various cooling measures on the property sector dampened transactions last year, with the volume of properties bought and sold dipping by 10.9% from 2012, even as total value rose 6.7%, a sign that prices did not come down.”

Most people may find the message contradicting and feel difficult to understand what is really happening now in the property market.

The data was collected from last year, but even until now we can still hear some gurus and investors say that property price will continue to go up, be it in KL, Penang or Iskandar area.

So it is going up or down?

Property Market Is Consolidating

Although the current job market shows that Malaysia’s economy is still in good shape, we have to stay open to be corrected anytime because statistic data has a delay effect to reflect the current situation. Especially after the incident of MH370 and those never-ending disappointing news, we expect the tourism industry of Malaysia will be hit considerably this year. Together with other uncertain economical and geopolitical factors around the globe, no doubt 2014 is a challenging year to Malaysia’s economy.

As for property market, though we can still feel the heat in Iskandar zone, the data of year 2013 has finally confirmed what we have been observing on the ground since last year – it is consolidating.

According to the report, in the primary market, new launches shrunk by 15% after three consecutive years of growth. Some 54.9% of 48,617 units of new launches in 2013, or 26,713 units were unsold.

Suddenly the music stopped? No, it did not happen overnight.

We have been experiencing rapid increase in the supply of properties throughout all states in the past few years. Now we are already in the over-supply region.

It may take some time for the authorities to recognise this fact because they are so afraid of being blamed again for those cooling measures introduced by them over the last few years.

In fact, as mentioned in my last article, government’s intervention has limited effect to cool down any market. It is the nature of supply and demand in all markets that drives the prices up or down.

We really cannot blame them, or anybody anymore, but ourselves.

Who is Swimming Naked?

The report shows that housing loan approvals fell sharply by 22.5% from an expansion of 47.4% in 2012, while total loans disbursed for the purchase of residential properties increased to RM74.4bil from RM64.1bil.

Thanks to the continuous effort of central bank that has been trying to minimise the risk of both lenders and borrowers, the dip in loan approvals seems deeper than the fall in the volume of properties bought and sold. This may indicate that most properties were bought by people who have better cash position.

The other side of the coin, however, the above data may also show that loan amount per borrower has increased significantly.

We can’t rule out there are quite a number of investors who have taken higher risk to borrow more to buy properties that may not be easy to sell now. Our greed may have driven us to face higher chance of being stuck in these properties now because we have no intention and no holding power to keep these properties in the first place. We can commonly find ourselves stuck in some new launch projects.

A famous quote from Warren Buffet in his 2001 Chairman’s Letter to Berkshire Hathaway Shareholders:

“After all, you only find out who is swimming naked when the tide goes out.”

We are always worried for those who greedily took the risk and over-stretched their borrowing right before the tide goes out. In some time, we are one of them.

Over-stretched borrowing to flip property is the most risky action in real estate investment. Investors in this trade let themselves swim naked in the tides of property boom. We won’t be surprised if we can even see builders or developers swimming in the same way next to us.

Soon we may be able to see more and more explicit scene in the market..

When we over-stretched and put ourselves in an awkward situation like this, we may be reluctant to let anybody know. With that in mind we will try to share some ideas and ways to improve such situation in another article.

Here we have to highlight again and again – cash-flow-generating properties are always our best protection in the ocean of real estate investment.

It Is Time To Go Fishing

My last article in this blog was published more than two and a half years ago. At that point of time I was being asked by many people if the property market would continue to go up or go down. I still can remember my estimation to some of them was that property prices may still on the uptrend for at least another 2 years, based on strong demand in both job and property markets.

I sat back since then to enjoy (or suffer from) the tide and barely invested in any property, while seeing all sorts of temptations floating around on the surface. I have to admit I couldn’t afford to chase after the rising price, but I took it as an opportunity to train my patience and endurance against one of the very poisons in us – greediness.

If we have been accumulating cash-flow-generating properties, we will find ourselves now enjoying the increased rental income pushed by another endless tide – inflation. We will also see the equity in these properties escalated by the tide of property boom. Now, we are in a comfortable and secured position that allows us to go for some relaxing activities.

I would suggest go fishing, as a reward for our patience.

While the property market is consolidating, it is time to consolidate our financial statements as a preparation to go fishing in the ocean of real estate, again. We should now be able to find more capital from the increased equity of existing properties, and more time to wait for better deal in an over-supplied market.

We have seen price of some sub-sale properties in JB area stopped going up or stagnant for months. Some of them are our favourite cash-flow-generating properties.

It is time to go fishing.

But never forget, be patient and calm – for no one can catch fish in hurry.