BARELY have we survived the aftermath of a two-year prolonged pandemic caused by COVID-19 – with businesses on hold, many jobs lost and tourism driven to a halt – and we are faced with the mother of all dilemmas: inflation.
Rising inflation is raising the prospect of a period of economic stagnation or even a recession, predicted AREA Real Estate Advisory Sdn Bhd executive director Datuk Stewart Labrooy.
“For four decades, the cost of consumer goods was a rare bright spot in the global economy with China being the world’s factory churning out products in huge volumes which just got better and cheaper over time,” he told FocusM.
“Raw materials were mined with new technologies and were in abundant supply as were building materials which fuelled a building boom that went on for decades. But no more. Prices were up 6.8% in the US year-over-year in February and will escalate in the coming months.”
In Labrooy’s view, the Great Inflation will squeeze family budgets, erase wage gains and raise the prospect of a period of economic stagnation or even a recession. With strong forces driving prices up, costs are likely going to get higher before they moderate.
In Malaysia, the debt to gross domestic products (GDP) levels have risen from 55% to 65% but with no firm plan to bring it down again.
“Expanding our money supply negates any attempt to use monetary policy to mitigate inflation. It just doesn’t work. It appears that prices will keep rising and stay that way for a long time,” he cautioned.
The ongoing Russia-Ukraine conflict – the third major force lifting prices this year – is witnessing the world’s biggest energy exporters being engaged in an unprovoked assault on one of Europe’s largest agricultural exporters.
“This means higher prices for commodities, translating into higher prices for manufacturers and retailers, hence, higher prices for families in a brief period,” he observed.
“The price of raw materials globally has jumped 16% in the first week of March 2022 – the sharpest increase in over half a century.”
How inflation affects the Malaysian property market
The main reasons why inflation is occurring are excess aggregate demand and cost-push factors.
An example of the former is a spike in demand for certain products and services while in the latter, an increase in wages, production expenses and the cost of raw materials oftentimes result in a high rate of inflation.
Examining the excess aggregate demand by analysing the current state of local real estate reveals a huge overhang of stock in the markets.
A recent media report showed that the total number of unsold units under construction was 111,804 units worth about RM60.6 bil.
By adding this figure to the total number of overhang units at 55,300, the total overhang and total number of unsold units under construction is a staggering 167,104 units worth some RM101.4 bil.
The 2021 National Property Information Centre (NAPIC) statistics revealed that the total overhang and total number of unsold units under construction escalated by 10.1% to 183,918 units while the value increased by 8.1% to RM109.7 bil.
With the huge oversupply, it is unfathomable that property prices will rise with prices possibly dipping as developers try to monetise their stocks.
The good news is that this will be temporary as today’s excess stock will be taken up and removed from the market, hence stabilising supply and demand.
“Developers may be forced to re-price future homes at a higher level to balance out higher material and labour costs. In essence, house prices will rise as will the valuations of existing properties,” projected Labrooy.
“In this inflationary market conditions, the best investment lies in hard assets like property as property has repeatedly proven to be the best bet against inflation.”
Moving forward, the property market will have to adjust in this period of high inflation by primarily dealing with higher interest rates driving the cost of home ownership higher while coping with softer demand.
Households will face higher prices for as long as the Great Inflation lasts.
“Unfortunately, there’s a good chance that a recession will end it. Anytime inflation has been this high and unemployment this low in the past seven decades, a recession follows, within a year or two,” observed Labrooy.
“Six out of the last seven downturns were preceded by spikes in the price of gasoline. In four, geopolitical crises were a proximate cause.”
We had better keep our fingers crossed that we can ride this one out together. – May 6, 2022
Yvonne Yoong is Focus Malaysia’s Property & Lifestyle Editor who is seasoned in covering the property beat and other industries.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Pic credit: Investopedia
