Property prices may fall 10% this year

Property prices, according to industry experts, could fall some 10% this year as rising unemployment and tighter financing policies erode consumers’ purchasing power.

Waning demand aside, a massive supply of properties from aggressive launches in previous years are also expected to contribute to the on-going downcycle in the sector.

Association of Valuers and Property Consultants in Private Practice Malaysia president James Wong said the drop of about 10% this year would be in line with the drop in property transactions.

“Most vulnerable will be the mass-housing market priced below RM250,000 each,” he told The Edge Financial Daily in a telephone interview.

The Malaysian economy has not been spared in the global slowdown. Exports fell 4.9% in November 2008 from a year earlier, the biggest drop in about seven years, as a weakening world economy reduced demand for the country’s major products in key markets.

During the month, manufacturing sales saw an annual contraction of 1.6%, the first decline in 13 months, due to reduced exports and domestic demand, amid rising unemployment as companies downsize.

To reduce the cost of funds, Bank Negara Malaysia (BNM) slashed interest rates by 75 basis points to 2.5% last month. It also lowered the statutory reserve requirement (SRR), the reserve capital financial institutions place with the central bank, to 2% from 3.5% effective yesterday. The move, essentially, frees up more capital for banks to lend.

However, market sentiment indicates that BNM has more room to lower interest rates. This is in anticipation of more downside risks to global economic growth as inflation cools amid weakening demand and falling commodity prices.

Hence, potential buyers could still be adopting a wait-and-see attitude as they foresee cheaper lending rates and lower real estate prices in the coming months to capitalise on the on-going property sector downcycle.

The Association of Banks in Malaysia said banks would always support viable customers with good track records even in the worst of times.

“Loan approvals hinge upon business sustainability, loan repayment track records, financial transparency and full disclosure of accounts,” it wrote in an email reply.

Penang is a market to watch. RHB Research Institute Sdn Bhd said real estate demand there could be battered in anticipation of rising unemployment as manufacturing firms slashed jobs to reduce cost.

“House buyers’ concerns about job security will continue to haunt demand for properties. Job cuts and shortening work weeks in the state will reduce purchasing power and affect consumer sentiment.

“On top of that, rental activities will be worsened by companies’ cost-cutting measures such as downsizing in operation, halt in capacity expansion, cut in housing allowance and incentives, or termination of foreign employees’ contracts,” RHB Research analyst Low Yee Huap wrote in a note.

Going forward, less property demand, and more supply in the coming quarters would lead to a bigger overhang in Penang.

At the same time, expectations of a massive shift to more affordable properties by house buyers will lead to lower average transaction price in the state, according to Low, whose latest report was issued following updates on Intel Malaysia Sdn Bhd’s plan to close down two factories in Penang.

“Investors should avoid developers which are heavily dependent on high-rise property projects in Penang island, as the segment will likely be impacted most in the current economic downturn,” said the analyst who rated the local sector underweight. - The Edge Daily

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