MALAYSIA PROPERTY: Don’t mess with market’s self-regulating mechanism

There are several versions of the proposal for housing developers to double up as financial lenders, one stating that interest rates could stand at a staggering 12-18%. The latest news is that the cabinet has given the green light and the various departments involved are studying ways to improve its execution. Meanwhile, housing developers have also clarified that they will not provide 100% loans for property buyers but will only help them come up with the downpayments at an interest rate of 6%.

Whatever it is, this new policy will invariably distort the modus operandi of the market based on the supply-demand principle, and will not be a good thing at all in the long run.

After a protracted period of irrational hikes in Malaysian property prices, the market is now showing signs of weakening, resulting in an embarrassing oversupply situation.

REHDA statistics show that rejection rate of housing loans by banks has climbed to a high of 70%. As a result, its members suffered a high of 61% of unsold units during the first half of this year, outpacing last year’s 48%.

From the perspective of supply-demand theory, this situation can be mitigated by means of price adjustments. When demand outstrips supply, housing prices will soar to a point when the demand lags the supply and prices will go down.

The market adjusts itself through that celebrated unseen hand in line with the supply-demand equation.

Indeed property prices in this country have galloped out of control over the past several years to an apex. The prevailing economic conditions of this country will no longer be able to sustain its continuous expansion.

Against the backdrop of fast rising property prices, an average wage earner’s monthly take-home pay lags far behind. As a result, they have to accept locations far from the city and houses that are way too modest in size.

Unfortunately prices will only move up and not down, thanks to capitalist greed. The only factor that can put a curb on such irrational hikes is sluggish sale owing to depressed demand.

As a matter of fact, this is part of the market’s self-regulating mechanism. When prices soar beyond reasonable levels to a point supply exceeds effective demand, house prices will slide until they reach an equilibrium point.

The so-called effective demand is willingness to buy plus purchasing power. Everyone wants a roof over his head but given the unreachable price tag, sufficient bank loan cannot be secured.

Banks have a set of loan application appraisal system. Whenever the risk exceeds returns, they will naturally reject the application. When this happens, we should be more prudent by allowing the supply-demand equation to guide the direction of price movements instead of forcing a rash intervention.

The objective of housing developers providing loans to home buyers is to artificially create a higher effective demand in a bid to address the sluggish sale problem while maintaining unit prices and continuing to harvest bumpy profits.

The latest measure is doubtlessly favorable to those eager to buy houses but are unable to get sufficient loans from the banks. However, such a measure will also destroy the market’s self-regulating mechanism in an outright disruption of the all-important supply-demand signals to keep the upward momentum of unreasonably high property prices.

House prices have soared way beyond the affordability of many. Market sluggishness is a signal that warrants the government’s attention to give the market mechanism a free hand to adjust itself through the interplay of demand, supply and pricing, to bring the prices to more down-to-earth levels.

–¬†Mysinchew

.