Will Property Prices Spiral Downwards?

Updated: Mar 12, 2019

Last week, international credit rating agency, Moody’s Investment Services, raised concern about spiraling property prices and high household debt in Malaysia. Moody’s concern was that this might have an adverse impact on the banking sector.

Oh oh, I'm falling!

However, Moody admitted that the speculation curbs introduced by the Malaysian government has resulted in the softening of property prices.

Meanwhile, iProperty.com reported that CH Williams Talhar & Wong (WTW) expects property prices to rise 10% - 15% this year. This expected growth is better than last year’s performance. The Housing Price Index (HPI) went up by 11.8% in 2012.

If WTW’s prediction is correct, then Moody may have reason to be worried.

The question now is, will prices continue to spiral down?

Speculation Curbs

One of the most significant drivers for recent home prices is speculation. In July of last year, iProperty conducted its regular Asia Property Market Sentiment Report.

In this survey, 43% of respondents in Malaysia said they owned more than 1 property. This loosely translates to 43% of the population owning 86% of the properties. From this, one can safely assume that speculation is thriving in Malaysia.

Now, it is important to note that affordable housing and checking spiraling prices have become a priority for the Malaysian government.

In Budget 2013, Prime Minister Dato Seri Najib Tun Razak announced an increase in Real Property Gains Tax (RPGT). With effect from January 2013, properties held for 2 years or less will be subject to 15% RPGT, whilst properties held for more than 2 years up to 5 years will be subject to 10% RPGT. Properties held for more than 5 years will not be subject to RPGT.

In 2011, Bank Negara Malaysia (BNM) also lowered the Loan-to-Value (LTV) ratio from 90% to 70% for the purchase of a 3rd property.

The net effect of these curbs is supposed to be a reduction in speculation and cooling down of the market.

Hong Kong and Singapore have instituted similar measures to successfully cool down the market.

From a macro-economic perspective, higher RPGT should stabilize prices. Moody too admits that prices are softening as a result of this.

Demand And Supply

Is there a healthy demand for properties in Malaysia?

The current annual household formation in Malaysia is 180,000.

Against this backdrop, the total increase in residential properties between Q4 2011 to Q4 2012 was 72,195 units. This is only 60% of the annual household formation and points to a shortage in supply. Therefore demand is healthy.

The laws of supply and demand state that prices tend to spike when demand is high and supply is low. However, this is generally true in perfect market conditions. Government intervention like the curbs mentioned earlier, can arrest price spikes.

The strongest demand in 2013 will come from the middle income segment (households earning between RM2,500 – RM7,500). Developers are starting to focus on this segment and government initiatives like PR1MA will help this segment.

The pressure to make residential property prices more affordable has and will continue to see government intervention. This could mean that we will continue to see a stabilization of prices.

Although Malaysia is an attractive country for foreign property investors, this group is too small to make a significant impact on property prices. According to Malaysia Property Incorporated (MPI), only 3% of property investors in Malaysia are foreigners.

Lending Practices

Moody can take solace in the fact that banks in Malaysia have started tightening their lending practices.

BNM introduced stricter debt service ratio guidelines in 2012 and prospective homebuyers’ loan approvals are now considered against their net income.

This guideline has resulted in tougher home loan approvals. According to CB Richard Ellis (Malaysia), the approval rate in February 2012 was below 50% compared to above 62% in 2008.

Taking into consideration that there is a gross mismatch between property prices and income, the tougher lending practices will make it difficult for a significant proportion of Malaysian’s to own homes, at least until there is more supply in the RM400,000 and below segment in urban centers.

This would have a negative impact on prices although in the long run, prudent lending practices are good for the whole economy.


There is very strong pressure to curb rising home costs. According to iProperty.com’s Asia Property Market Sentiment Survey (H1) 2013, 90% of Malaysians say that current property prices are unaffordable. In another survey, 74% of Malaysians said they are concerned about rising house prices.

The government has responded to these concerns with fairly laudable measures, namely an increase in RPGT, lower LTV ratios, and increasing the supply of affordable homes. BNM’s tougher debt service ratio guideline has also resulted in more prudent lending.

These initiatives provide some reassurance that house prices may not spiral in 2013 and that we may see more modest growth on average.

Another indicator that property prices may consolidate in 2013, is the decline in gross rental yields. This generally triggers investors to dispose their low-yield investments in favor of higher-yield investments.

Investors buying into the property market will also be reluctant to pay prices that result in low yields. Therefore, pressure for yields to go up may, to some degree, arrest spiraling prices.

Finally, Moody’s concern about high household debt is real and we may need to see wages that are more reflective of the present day but that discussion would be out of the domain of this post.

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