from m planet e zine by azizi ali

How to be smart before the event

Every now and then, I read about new ‘geniuses’ in the property market today. Apparently, their winning formula is simple: they locate a new property (usually condos), buy five units by paying the minimum down payment and borrowing the rest. And because the prices of the properties rose significantly in the last two years, they are certainly in the money, at least on paper. (Until they sell, all the profits are just paper profits.) Now, I must admit that I am happy for them. The higher the number of wealthy people in this country, the better it is for everyone. At the same time, I do worry about these folks. There are two flaws in their ‘winning’ formula, and both are major. The formula is based on the property prices continuing its rise and the interest rate remaining at the current low levels. Now they, and many others as well, may not want to believe me, but prices do not go to the sky and interest rate do not remain low forever! Prices can rise but it has to have some semblance to reality. The reality here is the balance between supply and demand. While price can and do get out of whack every now and then, economic sense if not common sense, will ensure it bounces back to reality. This had happened before in the mid-1980s and again in 1997. Prices rose to very high levels only to come crashing down. And I believe that current prices of properties in Malaysia are out of synch with reality. Of course, that is one man’s opinion. I will add though that I came to that opinion after much thought, research, observation and experience of being a player in the market for over 20 years. It is neither a spur of the moment thing nor one that is driven by emotions. Let me share with you what the former Chairman of Land & General, Tan Sri Wan Azmi, commented on the over building of properties sometime in the late 1990s: “There will be the tentative recovery, the prolonged boom and then the prices and scale get driven to levels which will prove unsustainable. Like it did in 1997, and 1985. Yes, we live; but no, we never learn.” The first two sentences ring a familiar bell while the last foretell of what may happen. Let me also share another interesting story. The legendary financier Bernard Baruch sold all of his stocks just before the U.S. stock market crash in 1929 (and made millions in the process). What triggered his decision? Apparently, a shoeshine boy gave him some stock tips, which he correctly took as a sign of market excess. Well, someone I met recently told me about the fantastic opportunity in properties! When a person whose name I never even heard of tells me about properties, I took it as a sign that prices are indeed excessively high today. So, I sold a couple of my properties in recent months. Now some people will be quick to point out the opposite; why prices in Malaysia are still ‘reasonable’. For example, one newspaper columnist wrote recently that prices can still rise because of the low interest rate, population growth, increasing income and the returns of expatriates. Further, he pointed out that prices in Malaysia are still low compared to Singapore and Hong Kong. Now, all these are valid points, and one cannot argue against them. But as I wrote earlier, prices must have some semblance to reality. When prices of a double-storey link house is half a million ringgit, the price is out of synch with the real world. How many Malaysians can afford to buy at these prices? And mind you, these are starter houses! If the market turns down (and it will do so one day), many investors will feel much pain. And when the interest rate shoots up, that pain will become unbearable! Many will not be able to service their loans, which will lead to the banks repossessing their properties and the investors losing tens, if not hundreds of thousands. Those who look so smart today may not look so smart once that happens. I need not remind you that not a single commentator will be there to ease the investors’ pain. They will have to carry the debt burden all by themselves. Another sad thing is that bubbles are only recognized as bubbles after they have popped. But unlike before, you now have a chance to be smart and wise before the event. If you think that prices are high, then why not sell some of your properties, realize actual profits, reduce your loan burden, consolidate your position and get ready to bite after the bubble pops? Copyright © Azizi Ali 2012