Tuesday, September 22, 2009

Property market distortion

The elements of the stimulus package and low interest rates may be fueling the apparent recovery of the Malaysian property market. Property prices are holding steady. It hasn't really come down. This has something to do with low interest rates. Lots of speculative property buyers are refinancing in the hope of unloading at the appropriate time.

There is local buying interest. This may be due to the ridiculously low fixed deposit rates. People may be shifting their savings into properties in the hope that capital gains will be better than fixed deposit interest rates and, maybe higher than government-issued savings bonds. In a sense this portfolio shift is part of the excessive liquidity that typifies the menu of economic stimulus measures taken by the government.

While this phenomenon is not quite a property bubble, it does point to a facade of economic recovery. It is an artifice that may lend support to the notion of a double-dip "W" recovery pattern.

The concern is that property developers may be misreading the signs. The original intent of the stimulus package was to permit existing property projects to be completed so that excess inventory can be cleared. But, the buying interest is engendering new property launches so that a potential vicious cycle is being created if there is another economic correction forming part of the "W" recovery pattern. What happens then? Can the government afford another stimulus package when it is struggling with a 7.6% of GDP deficit?

There is a disconcerting policy dysfunction where new property development plans are approved by state governments and local authorities while macroeconomic planning is done at the federal level. The federal economic planners need to communicate the macroeconomic concerns to the state governments and local authorities to avoid another round of excessive property inventory build-up. Failure to do so may negatively affect the economic recovery efforts.

1 comment:

masterwordsmith said...

Dear de minimis,

Your concise and precise post addresses a very pressing problem in the property market which tends to move in tandem to the economic cycle but not in present circumstances.

You have asked some pertinent questions which should rock the boat of helmsmen with a conscience but alas, these are few in number.

Whither do we go from here?

With so many red herrings thrown here and there, many are blind to the convoluted arguments/policies/promises and proposals of certain quarters.

There is distortion not just in the property market - but also social distortion leading to a downward cycle that is most disturbing.

Great post!