Saturday, April 10, 2010

Bumping into walls

No, I am not about to discuss the famous ‘Another brick in the wall’ song by Pink Floyd. This entry is on property bubbles in Malaysia, Hong Kong, and China. There is also some free lunch provided for pensioners on the safest investment in the world and the timing to invest in it.

If you wanted to know why house prices in Malaysia have suddenly risen in the latter half of 2009 to a spectacular high, check out the latest published Bank Negara report. It could also answer the foremost question on your mind (over the past few years) on how people can still find money to buy houses at new peaks. Simple, they borrow from banks.

According to the BN report, total household debt expanded by 9.4% to RM 516.6 billion or 76.6% of GDP as at end 2009 compared to RM 472.1 billion or 63.9% of GDP the previous year. Almost half of household debts were to fund house acquisitions. The volume of personal financing and outstanding credit card balances also picked up in the second half, expanding at an annual rate of 17.6% to RM 98.8 billion. Personal financing expanded strongly at 22.9% in 2009 to account for 14% of household debt. [Starbiz March 25 2010]

If we analyze the figures provided, at least RM 22 billion was borrowed by households to fund house acquisitions (half of the increase of RM 44 billion debt over 2008). Property players would also have noticed that after a tailing off, there was a sudden surge in demand and consequently house prices in the second half of 2009.

With the prevailing low interest rates scenario and constant prompting by market players, experts, and economists alike, speculators or ‘flippers’ have splashed out on houses with bank borrowings eager for short term profits or a quick kill and await for ‘bigger fools’ to buy from them.

Does this mean that the current upsurge in Malaysian property prices will continue for ever? Yes, if you believe in fairy tales. Or think like those property speculators who got badly burnt in the US, Europe, and Dubai, the past few years.

If we look around the world and into past trends of property cycles which represent change, we may get to know the answer. Otherwise we risk bumping into walls, and get hurt. How badly hurt investors get depends on the amount borrowed and the severity of falls in property prices. The amounts of credit used magnify both the gains and the losses. Since credit is a double edge sword.

Did Mencius not advise the Junzi not to stand near a wall since it can collapse? Knowing how to observe and read signs help. Since no one or any remonstration given can stop someone from bumping into walls if they insist on doing so, I occasionally remind my children with practical examples.

When bankers start questioning the reasonableness of property developers’ pricing of houses and shops, which they did last year in Malaysia, it provides a sign. When banks or Central Banks start raising lending rates, it is another sign. When banks advertise for more fixed deposits offering better rates than competitors but over a longer time span than the popular, it shows that their liquidity is fast dwindling – and that interest rates could further rise.

Banks are smarter than most but not all depositors are equally gullible!

For pensioners waiting for opportunities, wait for deposit interest rates to go very high (beyond the norm of good years or those paid by the pension funds) in your country of abode before tying in your cash in fixed deposits for the long term. Although interest rates can go sky high in the aftermath of the recent global financial crisis, they will fall back again after awhile otherwise economies would be 'strangled to dead'.

When house prices go higher than shops it carries a dire warning sign of over speculation. Can the houses rental match those of shops? One asks.

There are a few other signs that would show the peak of the property cycles in Malaysia, but go ask the same property experts who recently managed to convince you to buy for speculation or for a better word, invest.

According to recent media reports, apparently Li KaShing has had indicated that prices of housing units in Hong Kong have peaked. If it is so, investors or speculators of Hong Kong properties should take the cue from this Da Ren (great man) since realty and investments are his forte.

I particularly like his statements when asked by the media about the HK property market a week or two ago, which goes something like this: ‘Those who tell lies or exaggerate to mislead should be punished.’ ‘Those who bought into properties with their own money following his suggestion last year should have made some gains.’

To rein in speculative activities, China has recently stopped all government institutions including those of states to invest in realty using bank borrowings. The Chinese government realized that these institutions are fast becoming the main culprits in property speculation and for the rapid increase in prices since their borrowings constitute about 70% (?) of total lending for the purchase of realty in China.

When companies in various other industries use their cash and bank borrowings to load onto vacant properties arguably for long term investment, it is also a sign that the property bubble in China will burst soon.

Like in October 2005 while discussing Change, I have touched on the US property market, around the time when her housing prices have first started to fall. (No, we did not know back then, until years later when the media reports and statistics came rolling in.) Perhaps it is also coincidental that this entry touches on the property markets of Malaysia, Hong Kong, and China or maybe not.

For who knows change better compared to Yi aficionados who have spent decades of their lives studying and observing it? But how would I know?

Since your guess in change or property cycles, whether or not, luck plays a part, could be as good as mine.

However I blog this entry for a reason and when events unfold accordingly, I may elaborate why.


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