Real estate prices can't increased so much out of thin air, so i decided to hunt high & low and gather all the facts & truth, following is my findings:
1. Exemption of Real Property Gains Tax (RPGT)
RPGT is a taxation scheme introduced by Malaysia government in year 1995 to curb the speculation in property market, the intention of the Act? A property will be charged certain percentage of tax on the gain if being sold less than 5 years.
Personally, i think this is great as no speculator will invest into something that takes five years to sell in order to get tax-free. Unfortunately, in 1st April 2007, Malaysia government decided to exempt RPGT.
Soon after the RPGT exemption something miracle happened, real estate became a hot topic for everyone, suddenly, everyone get excited! Why? After almost 12 years (Year 1997-2005) of RPGT, property is a long-term investment in order to dispose without RPGT, but then, it became an investment you can dispose anytime for profit without tax. Let makes this clear, in Malaysia, a dividend you received from equity market no matter quarterly or annually, the dividend is subjected to tax, as it is a profit from business, but for real estate, sellers (individual or company) owe government nothing even they sell the property within a month.
Yup, your guess is accurate, the government reimposed RPGT on 1st January 2010 after more than 2 and a half years of exemption. During the period of exemption, a double storey terrace nearby my house at Cheras, has increased from RM350,000 to almost RM500,000. I recall my maths teacher did taught me percentage calculation during my school days, so it should around 43% increased in less than 3 years. So after RPGT being reimposed, after another 5 years, what's the price for the same type of terrace at the very same area? It is almost RM750,000 now.
The increment of property price been slowing down after reimposed of RPGT in year 2010, but it's somehow in a faster pace compare to year 1995-2007. According to data, Malaysia's population growth rate is less than 1.8% from year 2010-2014, and it's decreasing from year to year. Based on my observation, Malaysia still has plenty of land to develop, but why the real estate market didn't cool down? My observation? Human behavior. Do not deny, human is greedy creature, when we get to taste something great, we want more.
My question is, if government wants to improve the economy condition during 2007 crisis, should it be gradually decreased the RPGT rate instead of exemption? Let' says you forbid your kid to eat candy for sometimes, and suddenly you are out of town and your house is full with candies, what will the kid behaves?
2. Hot Money Inflows
Ever heard of quantitative easing (QE)? After i studied the long & dull article about QE policy, i found the simple way to explain QE is: Printing Out the Money + Extremely Low interest rates. After 2007 crisis, USA been launching the QE policy in order to boost the economy, so here was how the story begun...
How can a government attract investors by filling the market with tonnes of money but keep the bond interest extremely low? They can't. Alternately, investors will take the money, i mean tonnes of low interest money borrow from banks, and invest elsewhere. So which region to invest? Europe was in deep water just like USA, and the region even got a country bankrupted, Africa market is too fragile, South America...hmmm, taken and under controlled. Yes, Asia seems nice, crowded, high saving rate, plenty of resources and most importantly, lack of financial rules & regulations compare to western countries.
Long story short, money is like liquid, when you splash it, large area will be wet. After QE launched by USA administration, Malaysia is one of the country affected by hot money inflows, according to an article written on year 2011, Malaysia is in the fifth place of hot money flow in Asia, not bad huh. As domino effect, foreign fund managers (mainly carried US dollor) invested in Malaysia equity market, share went up and more money transaction, bank with more saving, loan provided much more easily, and inflation shot up, so did real estate. It is healthy? For me, inflation is good as long as gradually, its get evil when it is speeding.
3. Cheap interest & easy loan
There is one rule never change if you do invest, higher risk comes with higher return. Here's the trap, and i do believe the whole world is making the same mistake...when a country's economy in expansion & growing, which mean bank facing lower risk to lend the money, as the chance of default is minimal due to everyone is doing well and employment rate is high. Let's us change the situation upside down, when the economy is facing crisis, unemployment rate is high, equity is dropping, the chance of bank to face credit default is maximal, what's shall the borrowing rate be? Your guess is accurate again, reduce the borrowing interest rate. Doesn't make sense right? Me think that too.
Above chart is the Overnight Policy Rate (OPR) set by Central Bank of Malaysia or Bank Negara Malaysia (BNM), why real estate price shot up? A smart businessman always borrow money when the interest is low, as to maintain the cost, so does a consumer. But bear in mind, a business loan doesn't repay the installment as long as mortgage loan, it can takes up to decades for repayment, as the property be the liability for borrower, but asset for the bank.
After 3rd October 2010, BNM announced a policy which restricted borrower to lend only 70% of the house value if that is the third residential property. So let me be clear, during the period of year 2007-2010, investor able to avoid RPGT, enjoyed low borrowing interest and borrow 90% of the house value no matter how many housing loan you were serving at that moment. Great deal!
One of my own experience, i took a mortgage loan in year 2010 for a new project launched by a developer, the banker was introduced by the developer, not much documents requested but my payslips and ID, and i still recalled what the banker told me when the loan approved, he said:" you bought this property at the perfect moment." Until today, i still suspect how much commission the banker received.
To be continue...
I still have few points to share based on this Formation of Malaysia Propert Bubble, but i worry it might be too long & too dull to read the whole blog, and the crucial part is i'm feeling tired and exhausted at this moment.
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