It’s official. You heard it from the Prime Minister. The Home Ownership Campaign (HOC 2020) has been reintroduced for the period 1st June 2020 to 30th May 2021.
With interest rates at the lowest it’s been in decades, HOC 2020 is all the nudge you need to buy a house now. After all, you’ve been considering buying a house for some time now. You’ve been preparing for it.
But the coronavirus has put this plan on hold. You're staring at much uncertainty and are confused. Your social media newsfeed is not helping much. If anything, it’s adding to the confusion.
The future is either bleak or rosy. One day you read that nearly 2,000,000 people will be unemployed by the end of the year. Another day you come across reports that say Malaysia’s economy will grow by up to 9% in 2021.
While you digest this mixed bag of information, a friend tells you that the company she works for has cut her pay by 15% or worse still, that she’s lost her job.
Arghhh. What if this happens to you?
“I wish I knew what to do,” you think to yourself.
The opportunist inside you is wondering if you’re making a mistake putting off buying a house. The pessimist in you is worried if you are putting yourself at grave risk if you buy a house now.
Well, worry no more. This post will give you the clarity you need and banish once and for all the dilemma you’re facing.
We’ll deal with all the seemingly divergent information oozing out of your social media news feeds and the grapevine.
So, put your phone away, get yourself a nice drink, and dig in. You’re going to see if you should buy a house now… in 2020.
Rule #1 - The Golden Rule for Buying a House
A whole lot of uncertainty is swirling around your life right now.
What is your future going to be like? Will you have a job in the coming months or will you have to accept a pay cut? If you’re a business owner, can you survive the next one year?
These are very important questions and should be a big concern. It would seem foolish to think of entering into a purchase that runs into hundreds of thousands of Ringgit when you’re facing a threat to your income.
Property investment is risky if you cannot afford the property you buy. This may seem like an obvious statement at first. Surely, if you cannot afford a house, banks wouldn’t lend you money would they?
The truth is, the bank’s method for calculating your loan eligibility is not perfect. You don’t have to provide your bank with your COMPLETE monthly expenses. They only look at debts you carry with financial institutions and make assumptions about your cost of living.
Your expensive taste in food, your penchant for travelling, your kids’ extra curricular classes, and other monthly expenses are not transparent to the bank.
Banks also don’t factor in the cost of owning a house. Yes, there are costs and it can be significant. Some of these costs include:
maintenance fees (stratified homes),
These costs alter your cash flow significantly. Let me illustrate.
If you buy a house for RM800,000 with a 90% loan at 3.1% interest and repayment period of 30 years, your monthly installments would be RM3,075. Once you add in the running costs above, your outflow could average RM4,100 every month.
That’s more than RM1,000 on top of your monthly installments.
You may be eligible for a loan but if you’re living paycheck to paycheck (apparently 30% of Malaysians are), you may not be able to afford these additional costs.
You also risk losing your job or getting a pay cut now. You could afford a house today but may not be able to pay your mortgage 6 months down the road.
Therefore, Rule #1 is vital. It states that: you must have the financial means to buy a house.
Start by knowing your exact capital expenditure and cash flow. Then ask yourself if you can afford it. Think long-term.
If the risk of losing your job or receiving a pay cut is high, then you may not be able to handle the cash flow in the future. That means you don’t have the financial means.
Rule #1 supersedes everything else. There’s no confusion or dilemma. If you cannot afford a house, don’t attempt to buy one. End of confusion.
If you’re in stable employment and can afford the house you want to buy, this is the opportune moment. Read on.
Will the Housing Market Crash in 2020?
This seems like a perfectly valid question to ask before buying a house. I mean logically, you should avoid buying a house before a crash. It would seem stupid to buy a house today at RM800,000 only to find out 6-months after buying it, that the property is worth RM700,000.
Historically, house prices in Malaysia have been resilient even during economic crises. We’ve had 3 recessions between 1985 to 2019, and average house prices dipped in only one - the 1997 financial crisis. It dipped by 17%.
We’re now facing the possibility of a recession driven by lockdowns locally and globally due to COVID-19. Will the housing market crash as a result?
The short answer is; not likely.
For one, the financial system in Malaysia is sound. Post 1997, the banking system in Malaysia evolved and banks entered the current crisis in a position of strength.
BNM also recently reduced the statutory reserve requirement which flushed more liquidity into the system.
If the financial system can weather COVID-19, the housing market will remain resilient.
In addition to a sound financial system, most forecasts for Malaysia’s economic recovery in 2021 are good. Between reports from the World Bank, S&P, and IMF, the economy is expected to grow by 6% to 9% in 2021. These are very encouraging numbers that bode well for the housing market.
It is possible that housing prices will dip slightly after the bank moratorium ends. Banks are expected to see a rise in non-performing loans (NPLs). The combination of higher unemployment and increase in foreclosures and desperate sellers may cause prices to drop in the short short term but it’s unlikely that a market crash is imminent.
Why Price Fluctuations Shouldn’t Bother You
Fact: Unless you’re planning to sell your house 6-months after purchasing it, the drop in value doesn't really affect you.
The rise and fall of property prices are not real until you sell the property or you want to take out equity by refinancing. Did that sound confusing? Allow me to illustrate.
When you buy a house for RM800,000 and its value goes up to RM1,300,000 after 5 years, you have not realised any gain. You may think you’ve made RM500,000 but that’s a superficial gain. Until you sell the house, the increase in value has no material benefit.
Similarly, if the value drops, you’ve not realised a loss. The loss becomes real only when you sell the house. If you don’t sell, there’s no material loss.
You must also consider another important fact.
Housing markets are cyclical. That means, they’re never in perpetual decline. A crash is followed by a boom. The boom-bust cycle is a norm.
The high of every new cycle, is higher than the last cycle. This means the long term direction of prices in the property market is up.
Therefore, unless you’re a short-term speculator or looking for a quick profit, price dips should be accepted as part of the game. With enough time and with few exceptions, property prices almost always appreciate.
Should I Buy a House Now... or Wait Until 2021
Let’s go back to Rule #1.
Can you afford a house now?
If you can afford to buy a house now, this is perhaps one of the best times to do it.
Let’s look at the property cycle to understand why.
The property cycle is divided into 3 phases:
Recovery - a period of modest or slow growth after a recession and usually lasting 7 years.
Explosion - a period of high growth, the golden era, and usually lasting another 7 years
Recession - a period of decline or plateau lasting about 4 years
The best (and safest) time to buy a house is at the tail end of a recession or the beginning of a recovery. That’s because you can ride the full wave of the recovery and explosion to maximise capital appreciation.
The property market in Malaysia has been in recession since 2015 at least. Following 3 years of negative growth trend, in Q1 of 2019 NAPIC announced that the market had shown growth in 2018. Analysts agreed that this was an indication that the market had bottomed out.
In other words, the housing market was in recovery. It was a good time to consider buying.
Then the Coronavirus struck.
Should I Buy a House During Coronavirus?
This is a pandemic of epic proportions. Everything has changed. Until a vaccine is available for mass consumption, we’re in the deep blue ocean with no land in sight.
You shouldn’t be thinking about buying a house under these circumstances, right?
This episode has simply pushed the recovery back by 1 to 2 years. If the World Bank, S&P, and IMF are right, the economic recovery in 2021 is going to be impressive. In all likelihood, we may be at the cusp of a recovery in Q1 2021.
Other events taking place now make conditions for buying a house encouraging.
First, the HOC 2020 is in effect from 1st June 2020 to 30th May 2021. These are the full benefits of the HOC:
Stamp duty exemption on instrument of transfer for houses up to RM1,000,000 in transaction value. For houses above RM1,000,000 to RM2,500,000, there is a discounted rate of 3% on stamp duty. No discounts on houses above RM2,500,000.
Stamp duty exemption on loan agreement for transaction up to RM2,500,000.
10% discount on transaction price. You effectively get 100% financing if you qualify for a 90% loan.
Second, the 70% margin of financing limit for the third housing loan has been lifted for properties above RM600,000. This means you can buy as many houses above RM600,000 as you like now with 90% financing. And you can buy with HOC 2020 benefits.
Third, interest rates are at a 20-year low. If you got a 90% loan on an RM800,000 house in 2019, you’d have paid about 4.3% in interest or a total of RM562,000 over 30 years.
The same mortgage now will cost you 3.1% or a total of RM386,000. You save RM176,000 in interest cost.
These incentives and economic recovery forecasts mitigate the short-term risks during the Coronavirus pandemic.
So, Is Right Now a Good Time to Buy a House?
The current bank moratorium expires on September 31st. What happens after the moratorium expires is a major concern.
Will defaults rise massively? Will the increase in defaults strain the financial system? Would property prices tumble?
No one can say with certainty.
But taking everything we’ve discussed above, now is a good time as any to buy a house.
However, you should always be more concerned with the fundamentals:
Can you afford the house?
Are you buying a good product (developer reputation, build quality, location, maintenance)?
Are you paying market prices?
If you’re buying to rent, is there healthy demand from tenants?
These fundamental questions take precedence over timing.
You also mitigate risk by having a long-term approach. Buy a house with an 8-year exit plan at least. Don’t speculate on short-term gains. Such speculation works well in a short window during the expansion phase. Outside of that it is not feasible.
Short-term speculation is high-risk because of the tendency to rely heavily on assumptions about the market. In doing so, you may overextend yourself and put yourself in financial danger.
When you have a long-term approach and you buy on the heels of good fundamentals, your reliance on assumptions being 100% correct is low.
Is It Really Harder to Buy a House Now?
For the vast majority of people, buying a house is hard because:
They lack funds for the deposit and closing costs
They’re unable to qualify for a mortgage
Over the last 30 years, better access to mortgages have made homeownership easier. Research shows that homeownership has risen not so much because incomes went up in tandem with house prices but rather because access to financing became easier.
Homebuyers today can get 90% loans at relatively lower interest rates. This has reduced the required deposit and instantly unlocked large swaths of the market.
Now, you have the HOC 2020. This allows you to get 100% loans. The HOC also reduces closing costs significantly.
Buying a house is much easier now.
Be Cautious But Don’t Overthink It, This Could Be An Opportune Moment
Paralysis by analysis is an expression used in the consulting world. This condition prevents organizations and people from taking action. This happens with home buyers too.
During the market expansion in 2009, I listened to many home buyers speak of an imminent market crash. They wanted to wait for a crash or recession before buying. Then a recession happened.
Many of the same people said they would wait for a recovery before buying.
And then, lo and behold! There were signs of a recovery. Now, many of these same people said they’ll wait for a bullish market (an expansion).
In short, they never took any action.
You don’t have to overthink buying a house.
In the long-term, the property market is cyclical. Recessions are followed by recoveries then expansions. This means, it is almost always a good time to buy properties - except at the peak of an expansion.
The end of a recession or the start of a recovery is perhaps the best time to buy.
Always remember that good fundamentals are more important than timing. If you buy an overpriced house that nobody else would buy, your perfect point of entry is useless.
Before you buy, check Rule #1. Do you have the financial means?
If you can handle the cash flow and have stable income, your risk is further mitigated.
In order to understand the cash flow, you must be aware of your monthly expenditure. You can download my Ultimate Guide to Buying Property, which explains the cost details and comes with a free property investment calculator to help you get a clearer understanding of your cash flow.
If you pass Rule #1, this is perhaps one of the best times to buy a property.
It’s a buyer’s market now. We’re at the tail end of a recession with a recovery expected in the later part of 2021, interest rates are at its lowest in decades, and the HOC 2020 is in effect until June 2021.
In other words, conditions are rip