By Prof Dr Ismail Omar
What is a property market bubble? In general, the answer is about any substantial increase in the price of the property in the market, followed by a crash. Once the property investment factors drive the property market, it crazes up with the sky as the limits. This phenomenon is known as the ‘ballooning effect” which suddenly will explode, and as a result, the market will collapse.
Professor Benjamin Key, Jane Dokko and Lindsay E. Relihan, researchers at Wharton Real Estate, have presented a paper entitled “Affordability, Financial Innovation, and the Start of the Housing Boom” discussing a new tool as an early warning of instability in the property market. It was about avoiding the burst of the ballooning effect and the collapse of the property market.
With more flexibility in mortgage regulations, credit supply is expanded, which results in a higher ability to pay by home buyers. Prolonged low-interest rates may create a negatively amortising loan or known as an interest-only loan.
Additionally, the practice of moratorium or delayed repayment would also stretch out the duration of the loan, and hence the amount of repayment loan will be reduced instantly. As a result, the affordability is improved to be at a higher level.
In this housing phenomenon, house buyers may look at it in two folds. On one hand, as an affordability tool to put down the high house prices in the market. On the other hand, the availability of credit pushes the house prices higher for speculative reasons.
Consequently, access to housing availability is now wide open. With a full range of speculation, the property market is ballooning again, and if not handled carefully, it will burst once again.
Historically, these are the property market cycles of the world.
In the United States of America, the trend shows that home prices increased at a record high, accelerating at the fastest pace since the early 2000s. It shows that the housing market is doing something it hasn’t been doing since 2004, the scenario that portrayed the bubble in the property market is already ballooning and ready to burst.
Property gurus mention the low level of interest rates that drive the housing market. The fixed mortgage slid to 2.9% compared to 4% last year. Clearly, low rates of interest and post-Covid-19 had affected the consumer spending behaviour and have benefited the housing market at large.
In New Zealand, it was argued that stimulus and financial incentives are no longer the best tools to avoid a property market burst. Finance Minister Grant Robertson urged the banks to get involved in helping to slow down soaring home prices and fiscal stimulus to support the pandemic hits.
However, in his response, Reserve Bank of New Zealand Governor Adrian Orr said that the proposal would have a negative impact on the government’s aim to provide affordable housing and reduce the gap of housing inequality, pushing for a higher interest rates would have an influence on reducing employment, and thus affecting low-income earners. As a result of higher interest rates, the housing supply will be reduced due to an adverse effect.
The move by the government of Malaysia to boost the housing market by reducing interest rates to about 3 % during Housing Ownership Champaign (HOC) in the early pandemic has shown the rising demand in housing with potential buyers joining the game in the market.
With more relaxed financial rules, the demand has been made more flexible, property players, especially the buyers, were keen and excited to join and make a comeback in buying properties.
As a result, together with many more incentives available, the market was being vulnerable and getting a bit more mature.
Unfortunately, the implications of those incentives are not strong enough to repair the decreasing trends in the property market. During Covid-19 pandemic, house prices are decreasing by about 25% on average.
Hence, property gurus are expecting the possibility for the property market bubble to burst by the end of next year. This may invite the rise in demand for property in the weak market caused by several property speculators jumping into the market for speculation purposes.
It seems that the negative impact of Covid-19 was too strong, and a sudden increase in the number of recent infections has significantly hit the property market hard. A sign of property market ballooning has emerged when lenders are making mortgage regulations flexible and relaxed to initiate weakened demand besides tight supply in the housing market.
Judging from the impact of the pandemic on the interaction between demand and supply in the market, an equilibrium point is too difficult to arrive. The signal for an equilibrium point is nowhere in the market due to the ballooning effect instead.
So, what is the solution to cool off the game, and how? The game in the newly constructed houses is full of key players without fully informing them, and they are merely based on speculation. Therefore, a change in consumer behaviour has turned to speculative buyers in the market. Therefore, since the housing game is not yet over and the adverse effect of Covid-19 is still a scary scenario, a relaxation on interest rates seems not good enough in the long run. An alternative way of doing things may be more interesting.
With the impact of Covid-19 having a negative effect on the property market, and rise in unemployment rates, low demand for housing, rise in property overhang and people have a limited amount of money in the pocket for housing loan repayment, the prolonged duration of it may be giving a big push for the balloon to get bigger. Those incentives like tax exemption, moratorium and so on will only slow down the pace of ballooning. Interestingly, this phenomenon is only for a short while as many have said.
Therefore, as mentioned by property researchers at Wharton Real Estate, a new alternative tool as an early warning signal of instability in the property market had to be sought for. Alternative solutions would be something else rather than financial policy.
One of the solutions, therefore, is to look at the role of the supply side that facilitates or constrains the flow of land supply onto the property market.
With a restricted and slow rate of land approved for development, demand for property is better guided and so do prices in the market. As a result, the hot pressure in the market is cooling off and stabilising the market. Of course, the rules of the game in the supply side of housing should be simplified anyway.
PROFESSOR DR ISMAIL OMAR is the President of Land Professionals Association of Malaysia (PERTAMA) and lecturer in real estate at Universiti Tun Hussein Onn Malaysia.