Monday, September 5, 2011

Credit Growth v Asset Bubble

I am bothered by a report in Star Online containing this statement, "Analysts expect property loans to maintain their position as a key growth driver of credit expansion with some estimating them to grow between 10% and 12% this year due to the low interest rate environment and ample liquidity in the banking system.". 

Where does "credit growth" end and "asset bubble" begin?

This is something that should trouble Bank Negara Malaysia and Malaysia's economic planners. 

I have always believed that property-led credit growth implies asset-bubble formation since there are really no material salutary effect from property booms to the wider economy.

And, why do I say that?

If housing property booms are linked to genuine economic growth led by, say, manufacturing or commodities, then, we can safely assume that there is a growth in income to the nation's workforce who can then invest their surplus income to buy their dream home or invest in property. 

If there is loan growth from borrowings by businesses to fund expansion, then, there is some real economic action going on.

But, if loan growth or credit growth is led by property purchases, not led by business expansion, then, alarm bells should be ringing in the head of all rational people.

This phenomenon strongly suggests that Malaysians with savings are fed-up with low yields from fixed deposits. They are desperately looking for alternative things to park their savings with. 

These people seem to have found that buying properties in recent years gives them better financial returns in the form of capital appreciation.

Because of this series of transactions between and amongst these people, there is a perceived demand for properties above and beyond the norm.

People are buying properties, expensive properties, purely for investment in expectation of capital gains. They don't intend to live in these residential properties. They look down at the rental yields, which are paltry. They only want the capital gains. But, how long can this game go on for?

Banks are fueling this mania.

This is just my humble opinion. 

1 comment:

Raison D'etre said...

To me it sure looks like its already spiraling out of control with million RM property out in a whizz as soon as they appear in the market.

Really: Who is buying all these properties?

With the kind of flexible arrangement (pay zilch for the first three years and more later - or sell as a 300% hike in price!), I suppose speculating is not so painful looking after all.

As for me, I happy I bought my RM388K house (which I thought EXPENSIVE! then) when I did and not wait as looking for one in the same region now is like... urm, looking for a house price in the said region :)

Rumah Mampu Milik, huh? t RM300K to boot. Yowza.