We have all heard the saying, “Real estate prices will never come down!”. Most of this comment comes from our parents, their friends and the older folks who have lived through many years of hardship before us. Perhaps, it is logical to believe that real estate prices will never come down because there is inflation and things are getting more expensive each year.
However, is this fact or myth?
In reality, real estate prices do not always go up. Despite having a stable price movement, there are years when real estate prices consolidate and go through corrections before moving higher. Investors should understand the reality of the real estate market and plan their investments wisely.
Global Statistics: Do real estate prices always go up in United States?
Seeing that the USD currency is the World Reserve Currency, it is always interesting to understand how did the United States real estate market performed over the past years and compare that against the local real estate market in Malaysia.
According to historical housing price data, from 1975 to 2007, real estate prices in the United States showed strong bullish movement turning a USD 50k into USD 300k in 30 years (average 16.7% capital gain p.a). However, the reality is real estate prices do fall and when it does, it will take many by surprise – as it did in 2008 during the subprime crisis.
When the housing bubble burst and the financial crisis of 2008 happened, real estate prices fell 20% from an average of USD 320k to USD 250k. Property investors and homebuyers who went into the real estate market right before the subprime crisis had to hold on to their investment for close to 10 years before it breakeven.
By 2013, the average sales prices had rebounded strongly to levels before the 2008 financial crisis and the uptrend persisted until 2018 before it plateaued in 2019. When COVID-19 hit, instead of plunging, real estate prices went on an uptick with some real estate sold at almost double. This is an unprecedented event and we may not see something quite like it in the near future.
This unprecedented move was fuelled by limited building supplies, expensive international logistic arrangements and the primal fear of missing out among the millennials. On top of that, government handouts introduced fresh funds into the market allowing such a scene to happen.
If you missed the main gist, the housing prices data showed that real estate prices do not always go up. In fact, real estate prices today is a lot more volatile as compared to 30 years ago and can be more volatile moving forward into the future.
Malaysia Statistics: Do real estate prices always go up in Malaysia?
How has the real estate market in Malaysia performed in the past 30 years?
The real estate market in Malaysia has the potential for strong capital growth in the long term but it never is and may never be smooth sailing. If you look at the chart, while property prices have gone to an all-time high since 1990, there are years where real estate prices fell and plateaued. Hence, it is realistic to expect some turbulence in your investing journey.
If you look at the overall trend, real estate prices in Malaysia grew by 267%, from 60.45 (index price) in 1990 to 160 (index price) in 2020. To put into perspective, that is 8.9% growth per annum in the past 30 years. At the same time, it is worth noting that the index price takes into account all real estate prices throughout Malaysia, including real estate in the outskirts. Hence, there will be outliers such as real estate prices in the rural area diluting this growth rate.
In those 30 years, real estate went through a slow patch with prices plummeting from the height in 1997 by 20%. The real estate market in the early 20s experienced a slow recovery from the year 2000 to 2006. Interestingly, during the global financial crisis in 2008, the real estate market was not affected significantly. Since then, real estate prices have gone from strength to strength, hitting new highs in 2020.
Will the real estate prices continue to strengthen? No one knows but it is best to have an objective perspective on the overall real market movement in Malaysia.
I hope by now you are convinced that real estate prices can fall and it can fall hard as seen in the 1997 financial crisis. With historical data as reference, I am convinced that real estate prices can fall in the future and I believe all real estate investors should invest with this consideration in mind.
Will real estate prices always bounce higher after an economic crisis?
Statistically, real estate prices have often moved higher after an economic crisis, both in the United States and Malaysia. However, to say that real estate prices will always move higher after an economic crisis is not true.
If you had purchased a property in 1996 before the 1998 financial crisis in Malaysia, then you can attest to the pain of holding on to a real estate investment for 15 years with no opportunity to let go. Not to forget the interest charged on the real estate, it can take you another 10 years before you break even on the assumption the property was never rented out.
This brings me to the next point, having the property rented out is tremendously important in any real estate investment portfolio. If the property is rented out throughout good economic years, it serves as good business income and that adds to the capital gain experienced from the property. On the flip side, if the property did not experience any capital gain over long periods of poor economic performance, the rental income serves as a buffer to keep your real estate investment portfolio afloat.
To prove my point, let us do an investment case study for real estate investors between 1996 – 2012,
Case study 1: If the property was rented out throughout the tough periods
- Property purchase price in 1996: RM 200,000
- Property sale price in 2012: RM 250,000
- Average interest rate p.a: 7.5% (average from 1998 – 2012)
- Loan tenure: 15 years
- Rent yield at 5.5% p.a; rental returns was historically much higher in 1998 – 2012
- Maintenance cost at 10% of rental returns
- Rent collected after 15 years: RM 200,000 x 5.5% x 15 years = RM 165,000
- Property transaction profit: RM 250,000 – RM 200,000 = RM 50,000
- Total interest paid: RM 133,724
- Maintenance cost after 15 years: RM 165,000 x 10% = RM 16,500
- Investment position: Rent collected + transaction profit – interest paid – maintenance cost
- Investment position = RM 165,000 + RM 50,000 – RM 133,724 – RM 16,500 = RM 64,776 (Profit)
Case study 2: If the property was NOT rented out throughout the frothy periods
- Property purchase price in 1996: RM 200,000
- Property sale price in 2012: RM 250,000
- Average interest rate p.a: 7.5% (average from 1998 – 2012)
- Loan tenure: 15 years
- Rent yield at 0% p.a; never rented out
- Maintenance cost at 4% of purchase price for sale purpose
- Rent collected after 15 years: RM 200,000 x 0% = RM 0/-
- Property transaction profit: RM 250,000 – RM 200,000 = RM 50,000
- Total interest paid: RM 133,724
- Maintenance cost after 15 years: RM 200,000 x 4% = RM 8,000
- Investment position: Rent collected + transaction profit – interest paid – maintenance cost
- Investment position = RM 0 + RM 50,000 – RM 133,724 – RM 8,000 = – RM 175,724 (Loss)
**This will take an additional 5 – 6 years for the investor to breakeven on this property
The 2 case studies show the big difference between having your property rented out or not in the long run. Hence, despite the economic situation, it is important to keep the properties within your portfolio tenanted at all times.
If you need help getting started with renting out your property, check out this article where I studied the key differentiation of profitable landlords and real estate investors.
What are the factors that affect real estate prices in Malaysia?
When it comes to the real estate market, there is 2 classification of factors that will affect real estate prices in Malaysia.
The first classification is the micro factors such as location, accessibility and amenities that determine the property’s desirability potential capital gain against other properties. I covered these micro factors in another article, helping aspiring investors make better home-buying decisions. Do check them out!
The second classification is the macro factors such as the political landscape, global economic landscape and property market landscape.
1. Political landscape
Political change often brings negative impacts to the property market because of concerns from foreign investors. While it does not always affect the real estate market directly, a political change can potentially slow down foreign investment into the country as foreign investors wait for certainty in the market. Subsequently, there will be fewer foreign expatriates into the country with less demand for housing.
On the other hand, political change can also mean changing land policy, different development priorities and different building regulations. These political changes can have a direct impact on the housing market.
Taking as an example, the government change in 2021 from the Muhyiddin administration to the Ismail administration saw the MM2H regulation revised to the dismay of expatriates.
2. Economic landscape
The global economic landscape often provides the backdrop to the wider market, this includes the local real estate market.
An improving economy means more fresh funds circulating within the market due to the positive attitude and optimism in investment. This naturally translates into investment optimism and the willingness to take up significant financial commitments with real estate investment.
If you want to understand where the economy is at this present time, you should consider trends covering the unemployment rate, consumer purchasing index (CPI), national import and exports and international economic situations.
On the other hand, another factor to take into consideration is the mortgage loan interest rates. Historically, a high-interest rate signals a bullish and optimistic market. High-interest rates are typically introduced in a good economic situation because the general mood in the market is of exuberance and hype.
In contrast, interest rates are typically reduced in poor economic situations to encourage lending and the establishment of new businesses.
For property investors, low-interest rates will always be good because it makes lending more affordable. At the same time, the risk and burden to manage the property are much lower.
3. Local real estate market landscape
When it comes to the property market, supply and demand will forever be king. It is a fundamental economic principle – if the demand is high and supply is low, prices will naturally go up.
In large, if the property development scene goes unregulated and uncontrolled, there will be an oversupply and property prices will have a difficult time sustaining if the demand does not grow at the same rate.
The drop in average housing prices in Malaysia from 2019 – 2020 is the result of an oversupply in the Malaysian real estate scene. While this is true for the broader real estate landscape in Malaysia, real estate in popular areas continues to enjoy healthy growth due to the stronger demand.
This disparity is indicative that location is and should be considered the top priority in any real estate analysis. If you need help to understand why location is of top importance, do check out this article.
Final Word
It is a fact that real estate prices do not always go up. There will be years of consolidation, correction and years of strong bullish movement.
As real estate investors, it is important to recognise this fact and plan our investment accordingly. It is easy to assume the best economic years when estimating investment returns. However, the ability to plan for the worst years is the main differentiator of a successful investor from the rest.
I hope this article does just that. It shows you the reality of the real estate market and helps you plan ahead for your investment journey.
Until the next article, take care.
