Year of reckoning for property investors
IT is the season to be jolly and happy. Christmas celebrations started a week ago, while the yearend holiday season is already in the air.
The celebrations are also felt on the economic front. After a long time, the world is seeing synchronised growth in all major economies.
The United States, the European Union and Japan are all enjoying growth. Inflation and unemployment are low, allowing central banks to slowly raise interest rates.
It is not often that the world economy sees stability on all three fronts – gradual growth, low inflation and low unemployment.
Wages are on the uptrend, especially in the US where there is a structural change in its policy. The corporate tax rate is to be reduced from 35% to 21%, a move designed to help US companies improve their profitability and competitiveness.
With lesser amount in taxes to pay, companies in the US are already signalling that the savings would go towards rewarding employees with higher wages. From banks to steel mills and car manufacturers, companies have all stated that the extra gained from lower taxes would go towards employees.
Higher wages would lead to higher disposable income and improved consumer spending.
This, in turn, is expected to raise the inflation rate in the US to above 2%. An increase in the inflation rate will, in turn, spur a hike in interest rates and give more reasons for the US dollar to flow back to that country.
Already, there is speculation on three interest rate hikes in the US next year instead of two. A clear indication is the rising yields of the US 10-year debt papers, indicating that investors are selling long-dated bonds on expectations of a higher interest-rate environment.
The benchmark federal fund rate is expected to cross the 2% mark next year.
A combination of interest rate hikes coupled with President Donald Trump’s corporate tax cuts would augur well for the US dollar, and uncertain times for currencies in emerging economies such as Malaysia.
In the last few days of trading, the ringgit was holding at RM4.08 against the dollar, which is an improvement compared to RM4.49 against the dollar in January this year. The ringgit has appreciated by slightly above 9% against the dollar.
Since 2008, Malaysia, like the rest of the world, has been adopting an environment of low interest rates. This is ending next year.
Bank Negara has already signalled that the local interest rates would move up. Some economists are predicting that there could be two rate hikes, pushing the benchmark rate to 3.75% from the current 3.25%.
The positive outcome of a rising interest rate environment is that it would contribute to the strengthening of the ringgit. The yields on local debt papers would be attractive enough to ensure foreign money continues to stay invested in ringgit assets.
However, the downside to a rising interest-rate environment is costlier asset prices. In this respect, assets such as property are the most vulnerable at this stage.
Already, sentiment is bad on the property market because there are more sellers than buyers. The worst affected are those holding apartments for investment purposes where generally rentals are not enough to cover monthly installments.
A combination of an environment where rental yields are low and rising interest rates would only prompt more sellers to come into the market.
The property market should consolidate further next year, weeding out the weak investors.
On the brighter side, there may not be many weak property investors in the market.
This is because Bank Negara and the banks have restricted lending to the property sector for investment purposes since early 2016.
This is evident from the marginal decline in the household debtto-gross domestic product ratio. The ratio hit a high of 89.1% in 2015, up from 86.4% in 2014. In 2016, it was down to 88.4%, meaning that household debt in general has started coming off its peak.
Bad loans from residential property have remained stable at about 1.1% between 2014 and 2016. This year, the number is expected to remain subdued.
The biggest fear for property investors is a series of interest rate hikes which would burden repayments.
Bank Negara has been preparing banks for an environment where interest rates start to rise again. This is happening after a period of relatively low interest rates over the last 10 years.
The question now is whether existing owners and speculators are prepared for a higher interest-rate environment.