KUALA LUMPUR, 18 SEPT 2018- The growing property bubble is reaching a point of correction and should be allowed to find its own level, warned think-tank Institute for Democracy and Economic Affairs (IDEAS).
Senior fellow Carmelo Ferlito said the current bubble is the result of speculation, easy credit and a construction industry that is trying to cash in on that demand. The result is an overhang, especially in the luxury homes market, that is not about to be resolved by any intervention from the government, he said.
“If there’s no new announcement or policy made towards the property sector by the government from now, we can expect it to happen from early next year,” Ferlito told The Malaysian Reserve recently.
He said home prices are no longer increasing at the rate that they are used to, a clear signal that the indents are about to see a price correction.
“We have already seen the housing price stabilising. The quantity sold has started to go down, especially at the high-end. This is a signal that something is about to happen,” he said.
Ferlito said the government should allow this natural correction to happen. He said one area that the government should leave to market forces is in the affordable housing sector.
“If the government withdraws from direct intervention in the affordable housing sector, private investors might find it appealing to move there and exploit profit opportunities.
“I am sure that if the government let the bubble burst, prices will drop in a sensible way. But will the government allow this process to happen?
“Relaxed house loans, for example, can be a factor of delay,” said Ferlito.
He also strongly believes that the property market has reached a moment in which a readjustment is necessary.
“Because of positive profit expectations, justified by the demand dynamics and a favourable credit system, the high-end property (sector) expanded beyond the possibility for the demand to absorb new projects.
“On the other hand, initiatives in the affordable housing sector were, at least partially, crowded out by the strong government presence in that segment,” Ferlito said.
He said a similar situation happened in Europe and the US about 10 years ago.
“It would be good for the government to refrain from credit support, as it will prolong the bubble and further financially expose households, in a moment in which the household debt on GDP is around 85%.
“In Europe and the US, the crisis was delayed by credit support and this made it worse. Moreover, the crisis demonstrated to be the best way to move the price downwards,” Ferlito pointed out.
When asked whether the Sales and Services Tax (SST) would affect the current housing prices, Ferlito said it is very difficult to say for the time being as there are numerous factors affecting the prices.
“Looking at the SST rules, I do not see an easy forecast as it seems to me that it may bring upward the general price level. It is still too early to estimate the impact on the economy.
“However, it seems less straightforward in implementation when compared to the Good and Services Tax (GST).
The fact that SST on sales is not a fiscal credit, like GST was, may generate a rising price dynamics affecting ultimately the end users.
“More specifically, regarding housing prices, I see difficulty in predicting when and how much they are going to drop. The situation will depend for sure on the housing policy recently announced and if it will take a marketfriendly direction or not (it seems that the government is more keen on adopting a ‘visible hand’ approach, which means to intervene directly to regulate the market).
“At this moment, the best way I see for the government to act is to withdraw from the affordable housing market and implement instead a system of fiscal incentives for investments in that sector,” he said.
In July this year, ,Ferlito had said in a statement that the high involvement of government agencies in the affordable housing market risks crowding out private initiatives and preventing the necessary restructuring from taking place.
“It is important to let the bubble to burst; too much credit will only delay the bursting, keeping prices artificially high and putting at risk the financial solvency of buyers.
“Without credit support, the crisis will happen faster and force both capital restructuring and prices to move downwards,” he added.
First published in The Malaysian Reserve Online, 18 Sept 2018.