A house should not be a stock

RECENTLY, a peer-to peer (P2P) property crowdfunding scheme was introduced to solve the housing issues, such as unaffordable housing and unsold properties, plaguing the country.

However, it is submitted here that a property crowdfunding scheme or any other similar property funding scheme might make the housing market less robust and more prone to a bust, given the interplay of credit or liquidity in the housing market, the stretched housing affordability and the role of investors.

Why are houses so unaffordable in the first place? Here I will turn to the excellent analysis of the housing market done by Bank Negara Malaysia over the past years.

We can surmise that the problem stemmed from the fact that the growth in house prices has outpaced the growth in household income. It is not that household income has been too low or has not grown. The fact is that house prices have just simply grown too high too fast!

For example, Bank Negara’s Cheah Su Ling et al. (2016) showed that from 2007 to 2009, the growth rate of household income largely tracked the housing prices at about 5%. (The growth rate is compound annual growth rate or CAGR.) Back then, I think, we did not hear much about the issue of unaffordable housing.

From 2012 to 2014, they showed that property prices at the national level had a growth rate of 17.6% versus the growth rate of 12.4% of median household income at the national level.

Using the median house price to the household’s median annual income or the Median Multiple (MM) approach to gauge the housing affordability, the multiple was 4.4 times in 2014. This multiple is considered “seriously unaffordable”. The median house price was RM242,000 and the median annual income was RM55,020 at the national level.

Bank Negara followed up its property analysis in 2017 and pointed out that the large number of unsold properties is due to the mismatch between the prices of new launches and households’ affordability. In short, the mismatch was exacerbated by the slower increase in median household income (CAGR 20122016:9.6%) relative to median house prices (15.6%) (Cheah Su Ling et al. 2017).

Bank Negara also pointed out that the median multiple had jumped to 5.0 times in 2016.

By the way, the last time we saw similar rapid house price increases was from 1992 to 1996 (11.2%). But back then, mortgage loans were only about 10% of the country’s GDP. Right now, the residential mortgage loans are about 40% of the county’s GDP, hence the health of the property market will now have a bigger impact on the economy.

Should the growth in house price continue to outpace growth in household income, I guess the median multiple could have rendered it “severely unaffordable” or the highest rating. It is also a significant deviation from its long-term median multiple trend of about four times from 2004 to 2014.

Have we already entered into bubbly territories in terms of housing price at the national level?

Previously, we only saw signs of froth in major urban centres such as Kuala Lumpur, Petaling Jaya, George Town and Johor Baru but there was no nationwide bubble.

What then drives the rise in house prices? The short answer is credit – or more broadly speaking, liquidity growth.

For instance, IMF’s Zhu Min pointed out that “statistically, credit growth can account for nearly half of the variation in house price increases across countries since 2009.” (Min Zhu, Managing House Price Booms in Emerging Markets, 2014)

Morgan Kelly of University College Dublin, in his analysis of the Irish property bubble in 2008, went as far as to show that the rise in Irish house price can be almost entirely explained by increased mortgage lending, with interest rates a secondary role, and population none at all. (Morgan Kelly, The Irish Credit Bubble, 2009)

In our case, the Malaysia Housing Price Index (MHPI) rose from 100 to 184 from 2010 to 2017 – a mere seven years. During this time, our country’s mortgage debts rose in lockstep with the rise in house price. The quick takeaway is that the more liquidity flow to the housing market, the more house prices will rise.

Between 2010 and 2014, we can also notice a heightened increase in house price together with high credit growth.

Over the last few years, Bank Negara has curtailed credit growth and introduced macro-prudential measures, including but not limited to a ban on developers’ interest bearing scheme (DIBS), to cool the property market. House price growth has since slowed down.

The question is, would this property financing scheme that purports to inject more liquidity into the housing market, in addition to the already existing conventional bank lending, help to push housing affordability even further beyond reach since the more liquidity flow to the housing market, the more house price rises?

Would it also negate the effectiveness of the monetary policy and macro- prudential measures that help to rein in galloping house prices?

Let us now also examine the role of investors in the housing market. I would further add that it is not just the credit or liquidity growth but possibly also the unbridled “animal spirits” among investors and buyers that help to ignite housing price booms.

For example, we noticed that prior to 2010, housing project launches typically took two to three years to be fully sold. From 2010 to 2014, housing projects were sold out upon launches! There was also a proliferation of property clubs to buy houses in bulk at a discount and to flip them later for profit.

Individual investors and institutional investors alike are treating houses as a distinct asset class just like stock or bond! Houses are bought not primarily for dwelling but solely for investment or speculation. Is it a surprise that we witnessed a stock-like price appreciation in housing prices during that period?

We have to ask if investors in the forthcoming property investing schemes would play a similar role as in the past. After all, property investors are solely driven by profit and loss.

Experiences from elsewhere also indicate that the more concentrated investment players in the housing markets and the more stretched the affordability ratio, the housing price condition would be more fragile.

This is because investors are usually considered not that “sticky” if compared to the owner-occupiers. After all, they do not live in the said investment properties and probably also have not grown emotionally attached to them.

Hence, at the first sight of trouble, they will just simply dump the investment properties, adding yet to more price decline.

By the way, there is also a close link between falling price and mortgage default.

The national housing price index is now showing some cracks and the coming correction might just make house prices more affordable.

At this stage, we do not know whether the correction is a mild or severe one. What we do know is that reversion to the mean is the iron law of the markets.

Should financial conditions continue to be tightened, the bet is on the downside. All in all, I think we need to be more circumspect when it comes to more securitigation of the housing market. A house is not a stock!

I am neither a property industry player or expert nor an economist. I am just a concerned citizen offering my two-sen worth of thought in this unaffordable housing discussion.