Please take this entire post with a huge grain of salt. I am not an experienced investor and I have no special knowledge of the local market. Plus I can and have been spectacularly wrong. So this is all just amateurish speculative musing. Also, this is mostly written from the perspective of a property investor. If you’re buying something to stay in yourself, you can rarely go wrong so long as you’re happy with what you’re buying.

The talk of the town lately is the ongoing boom in residential property in the Klang Valley. No one in KL could possibly have avoided noticing that double-storey terrace houses in desirable areas are now in the RM700k to RM800k range. That is up from around RM500k just two to three years ago. And prices are still going up with no end in sight. Despite recent moves by Bank Negara to curtail lending for property purchases by limiting loan amounts to 70% of the value of the third property and above, lending has actually increased in the first quarter of the year.

Normally a boom in property goes hand in hand with a booming wider economy, so there are usually few complaints about expensive houses. Look at the example of Ireland where the property boom brought prosperity to large numbers of people. But the steep hike in prices without corresponding increases in income has prompted widespread public outcry here. Plenty of younger Malaysians are concerned about the affordability of houses in the Klang Valley. Over the past two weeks, I’ve participated in a number of discussion threads on the topic on the LYN forums. So this post will be a summary of the arguments I’ve made and the counter-arguments I’ve heard.

First of all, not even the most enthusiastic bulls think that price increases on this scale are sustainable. Being optimists, they have an annoying tendency to always see the inevitable price correction as being two to three years away, so it is still a good time to buy. But they also argue that at worst prices in the Klang Valley will stagnate for a while but think it is more likely that price increases will be more moderate in the future. Their arguments are roughly as follows:

1. The bears argued that the Malaysian property market would be due for a correction following the implosion of property prices in the US due to the subprime crisis. They were wrong and this did not happen. There was a short blip in local property prices but after that, as we all now know, prices increased faster than ever.
2. The demographics are still in favor of increasing prices in the Klang Valley and demographics are always king. The population in the area continues to increase, not just because of babies being born but also due to increased migration from other parts of the country. The area that is considered part of the Klang Valley continues to grow as well as previously peripheral zones and now well and truly part of the metropolitan area, making properties in the core areas even more desirable.
3. Local properties look expensive to Malaysians working in the country but look like a bargain compared to places like Singapore, Hong Kong and even China. Affluent Malaysians who work in these countries are more than happy to snap up any residential properties for their families or for themselves when they return, ensuring that prices will never fall to bargain basement rates.
4. The Malaysian MRT project, said to be the largest ever construction project in the country, will massively improve the transportation infrastructure of the Klang Valley and thereby justify the increased prices. Granted, everyone is pretty skeptical if the government will pull this off, but if it does happen, the effects will be huge.

These are pretty good arguments, but I think the bears can advance a pretty good argument of their own with just one word: China. More than ever, I think Malaysia’s fortunes, as well as that of the entire Southeast Asia region, is tied up with that of China. The problem here is that China has a huge property bubble of its own. A discussion of the evidence for that is way out of the scope of this little blog post, but here are some links:

1. The ghost towns of China with an estimated 64 million empty homes.
2. The largest shopping mall in the world is in China and it happens to be almost completely empty.
3. Speculating in property is now so expensive that those with less capital are now speculating in graveyard plots instead.

As I posted on LYN, a crisis in the Chinese property market is different from the US subprime crisis for the following reasons, cut and pasted from the relevant LYN thread, so pardon the lack of formal language here.

1. When the subprime bubble burst, economic growth in China more than made up for the slack from the US. The crisis merely accelerated the switch of focus of the Malaysian economy from the US to China. When the China bubble finally bursts, it will come at a time when the US economy is still weak. This means there will be no one to make up the slack this time, no global provider of demand. The Malaysian economy is puny in comparison to the US and China. Since the Malaysian economy is strongly export-oriented, if both of these giants catch a cold at the same time, the Malaysian economy must surely get pneumonia.
2. Everyone knows that the property market in Malaysia is driven by the Chinese in the country. And one way or another the Chinese in turn are more economically dependent on China than the other races. There’s also the psychological factor as I’ve mentioned. Most of the Chinese in Malaysia could care less about property price indices in the US. But when it comes to China, many Malaysian Chinese have lots of stories to tell about how much house prices in Shanghai have gone up in a year and so on. Heck, my wife’s parents watch Chinese news channels and they have regular segments on property indices in all the main Chinese cities as part of the news reports. This gives the Chinese in Malaysia added confidence about how property is always a good buy.
3. By and large, Malaysia banks don’t care what happens to US banks, so they were not contaminated by the falllout. But when the property bubble in China bursts, it will also affect Hong Kong, Malaysia and Singapore. Do Malaysian banks Do Malaysian banks have lots of dealings with Hong Kong, Singapore and China? I believe so. This could get very messy.

Due to this, when people talk about house prices in the Klang Valley and speculate about whether they’ll keep going up or whether we’re overdue for a correction, I like to point to China as our bellwether. I think that as long as the party lasts in China, house prices in the Klang Valley will stay high. But if China stumbles, prices could come under some serious strain.