Property glut must be reset
Lee Heng Guie 
The government has frozen approvals for luxury property developments whose units are priced at RM1 mil and above

Despite a multi-year consolidation amid moderating prices, the property sector must go through a reset as it rebalances from oversupplying the consumer and investor market. An intervention policy is urgently needed to help unwind the imbalances in an orderly fashion.

Bank Negara Malaysia (BNM) is commended for its resolute efforts to raise the red flag on the worsening imbalances in the property market. We believe BNM has exhausted all its avenues to compel the government and relevant agencies to act now before the imbalances get from bad to worse.

As the central bank repeatedly reminds the authorities, there is much at stake as regards the present and future oversupply in the property sector. The wider economy and banking system’s stability would be challenged for reasons that no responsible policymaker can afford to disregard.

Finally, Putrajaya has temporarily frozen approvals for luxury property developments (shopping malls as well as commercial and residential developments) which sell units at RM1 mil and above with effect from Nov 1. The freeze is long overdue but is never too late before the imbalances implode and exert a downward spiral on prices, capital returns and rentals in the event of major shocks.

The oversupply numbers in the residential and commercial property segments are worrying and troubling.

i)  The rise in unsold residential properties reached a new high of 146,497 units as of Q2 2017 (130,690 in Q1), compared to average unsold units of 72,390 during the 2004-2016 period. Some 80% of unsold residential units were priced above RM250,000.

ii)  In the commercial sector, the incoming supply of 31.9 million sq ft of office space from next year to 2025 is expected to exert downward pressure on the already lowest office rentals in the region. The office vacancy rate is projected to reach an all-time high of 32% by 2020 compared to 5.1% in 1997, 20.1% in 1998 and the historical peak of 25.3% in 2001. It is projected that one in three offices will be vacant by 2021.

iii) The glut in retail space in shopping complexes is even more alarming. There will be incoming supply of 140 new shopping complexes by 2021 across the Klang Valley, Penang and Johor.


Rising debt burden

The attendant economic and financial risks associated with the property glut are real and should be taken seriously. A sharp correction in the property market due to severe economic and financial shocks will have negative spillovers on the wider economy and financial institutions.

As of September, 46.2% of the banking system loan book is for the purchase of residential and non-residential property, which stood at RM720.9 bil and takes a lion’s share of 54.2% of total gross domestic product (GDP). The property-related sector contributed 10% of GDP and has linkages with more than 120 sub-sectors, having 1.4 million employees.

As of end-September, 56.9% of total household debt (RM891.9 bil) is for the purchase of residential property (RM507.8 bil). For those who can afford to buy homes, it nevertheless increases the debt burden from mortgages. Thus, this compounds and adds further risks to the vitality of the economy when something goes wrong, such as unemployment and income loss due to an economic downturn or higher interest rates.

In the residential sector, there is apparent insufficient supply of affordable houses (priced below RM300,000) relative to demand. BNM estimated that the demand for affordable housing is 48% relative to the supply of 28%.

The freeze order, which applies to only new applications for development projects, should consider including approved projects that have not commenced construction as well as to reschedule mega projects initiated by the public sector, government-linked companies or the private sector.


Effectiveness in question

The slow delivery of affordable housing under Perbadanan PR1MA Malaysia calls into question its effectiveness, or the set target is too ambitious and unrealistic. Delivery of affordable housing is still far from the target of 1.1 million units. Only 23% have been completed and 285,097 units or 25.6% are under construction while 432,415 units or 39% are at different stages of planning. Land banking, developers’ margins and approvals are some of the issues that PR1MA has to contend with.

Over-investment and channelling of too much resources to the property industry to shore up economic growth is deemed unsustainable. It can prove detrimental as it destabilises the economic and financial system when the oversupply situation becomes chronic and the bubble bursts.

The last thing we need is to head off the worst-case scenario of a sharp correction in property prices and a market crash. The property cooling measures, including responsible lending guidelines implemented between 2010 and 2014, had not only curbed speculative investment but also moderated property prices to a 6.9% rise in Q2 2017 from a high of 14.3% in Q4 2012.

The contained property overheating market environment will help to shelter the sector from a major correction if there is an economic or financial shock.

Lee Heng Guie is the executive director of Socio-Economic Research Centre (SERC), an independent research organisation

This article first appeared in Focus Malaysia Issue 261.