Q3. How the real estate bubble occur in property market.

Also, explain the effect of real

estate bubble to property market.

As we know that real estate bubble is a type of economic bubble that occurs in local or
global property market. It is happen when there is a rapid increase in the market price of real
property such as housing until they reach unsustainable levels and then decline. It is a
temporary event but it can last for years. For example that happened in U.S. in early 2006, the
price of housing in the U.S. peaked. By the end of that years, prices began to soften, and by
2007 the bubble burst. It doesn’t give a sudden burst to the property bubble but the effect of
the property bubble is a long term effect. In U.S. those who had overpaid for their homes
panicked. In other words, millions of homeowners suddenly owed far more on their property
than they could expect to sell it for. How its price can be unsustainable is because there are
some reasons outside the norm where the price can be higher than the normal price.

The reason such as demand, speculation, high level of investment, easy access to credit
where there are a lowering of underwriting standards that brings more buyers to market. In
Malaysia there are some reasons that can be the cause for real estate bubble. For example, bank
offered a very low interest rate, variable or adjustable rate mortgage, loan period exceeding 30
years or until above the period of retirement age, loan that exceed the price of the property.

Traditionally, housing markets are not as prone to bubbles as other financial markets
due to the large transaction. However, a combination of very low interest rates and loosening
of credit underwriting standards can bring borrowers into the market and fuel demand. A rise
in interest rate and a tightening of credit standards can lessen demand, causing the housing
bubble to burst.

Generally, the price of housing is the same like price of any good or service in free
market where it is driven by supply and demand. When demand increase prices also will
increase. In property market prices rise because demand trends outpace current supply trends.
Supply of housing is slow to react to increases in demand because it takes a long time to build
a house, and in highly developed areas there simply isn’t any more land to build on. But if there
is a sudden increase in demand, prices are sure to rise.
 In this problem as we can see the speculators (bank) took some advantage towards the
borrowers. In contrast, speculators involve in the housing market as soon as prices begin to rise
above than average normal rate and where people started to buy or sell their property.
Speculators aim is to buy the property or take the property from borrowers who can’t pay off
their loan and quickly sell it to someone else who is willing to pay an even higher price. At
some cases, it gives speculators some profit and with no risk at all. But there are cases that is
vice versa. For example, subprime crisis where this happened in Malaysia. When the price of
the property decrease the borrowers who can’t afford to pay their loan will be in a huge
problem. It is because the value of the loan is higher than the price of property. To avoid from
any loss, bank have to increase the rate and then borrowers can’t even afford to pay the loan.
This will cause loss to both parties. For instance, in U.S. the price of the property in September
2010 is 23% less than the actual price of loan. Example, the price of the loan is RM100,000
but the property price is RM700,000.

As we can see, the collapse of property prices can be lead to the financial market crisis
as property is one of the most important collateral for bank loans. It is shows that there is a
close connection between a slump in real estate values and a financial market crisis. The burst
of the real estate bubble mainly caused by the subprime crisis as mention above. Real estate
prices have a substantial influence on construction activity and private consumption.

Most importantly many worse things can happen if the real estate bubble burst. This
happen when excessive risk taking become pervasive throughout the housing system. When
the supply of housing is more than demand. Generally when demand decreases while supply
increases, resulting in a fall in prices. This risk can triggered by losses that suffered by
homeowners, mortgage lenders, property investors and mortgage investors.

For instance, Singapore real estate has declined at 21.5%. It is show that the property
bubble eventually waiting to burst. Singapore is known as the most expensive real estate in the
world. It has the highest standard of living of any country in Asia and even it is higher than the
U.S. If we go looking at the problem deeply it is because the country is 100% urban and has
limited land and making it incredibly susceptible to the kind of bubble that’s formed there.
Graph 1.0 This graph show Singapore real estate bubble.

Clearly the real estate bubble is waiting to burst. From the graph we can see the latest price of
the property is still higher than 2009.

In Malaysia, the housing prices are already coming down indirectly at a steady rate because
developers keep offering rebate, free furnishing and more. All these amount lead to price
decrease. But the rate is still manageable. The sad news is many of the property that overhang
and unsold properties are at an all time high in a decade. This cause developers to default
bridging loan payments, thereby resulting in a domino effect on loan defaults and this could
cause a financial crisis, signalling the housing market is about to burst. If home prices are still
going to decline, and mortgage defaults are likely to rise.
Q4. Does property bubble occur in Malaysia? Explain.

Based on a few articles that released by The Institute for Democracy and Economic Affairs
(IDEAS) through newspaper and website. They predicts that the property bubble which has
been building up from years ago will burst soon. As they said, the Malaysian government
should be ready for the nation’s property bubble to burst and the risk than can lead to economic
crisis, following by spectacular growth in the high end property segment.

Through Edgeprop, on 24th July 2018 IDEAS said a policy paper authored by senior fellow Dr
Carmelo Ferlito indicted the spectacular growth in the high end property segment was ignited
by rising profit expectations, growing demand and at a later stage, a supportive credit market.

Ferlito said in the statement “The focus on the high end segment was justifies by high demand
and it is therefore natural that investment expanded in that sector. However, now that it appears
clear that unexploited profit opportunities are disappearing, a capital allocation restructuring
appears necessary.”

Generally, because of high involvement of government agencies in developing of property

market, it risks crowding out private initiative and preventing the necessary restructuring from
taking place. It is important to let the bubble to burst and government should come up with
ideas that can stabilize back or make the property price back to normal. Even after the bubble
burst it will trigger the economic slope but for a better future for Malaysia we should take an
action to prevent worse things that can happen.

As we can see, housing prices in Malaysia just not make any sense because there are too much
affordable houses below than RM500,000. It can cause oversupply of units especially the high
end cost of property. Clearly, most buyers are aiming at properties that below than RM400,000
and not these expensive or luxury units. Most of developers are focusing more on affordable
homes. On a large scale this will affect the sentiment of the whole market.

From different articles that said by Rahim & Co’s Strategic Planning and Research Director
Sulaiman Akhmady Mohd Saheh said the current property bubble are irrelevant and there will
be no serious concern of such kind in the years to come. Since Bank Negara Malaysia (BNM)
stabilize the local property market among others including to abolish the Developers Benefits
Under Liquidity Scheme (DIBS) and tighten the conditions for successful financing, to ensure
the property market continues to be resilience.
In this year 2018, it is a challenging year for Malaysian property market, as General Elections
2018 (GE13) give the boosting momentum and a better direction for the country’s property
sector. Compared to 2017 property market, it seems property market in 2017 more stable than
this year.

In Malaysia, even the property seems starting to burst but government took a play safe action
by stabilize the property bubble and prevent it from burst.

Graph 2.0 This graph shows on Malaysia wages and property prices.

In the graph the prices increase seems to be from increased demand from growing wages. The
prices have outpaced the wages, but standards of living in Malaysia have been increasing from
a few past years. Maybe the price may enter the bubble territory in the future, but the bubble
are currently adjusting to the standards of better living. It does look like the government has
taken recent action by cutting subsidies, cutting spending. Other than that, overall in the market
we have not seen any panic selling of housing property happening in Malaysia. Besides, landed
homes are still seeing a healthy take up rate of 65 – 70 percent which means that the demand
is positive for this type of properties.
Incomes must rise before property prices could, or else affordability is capped. This are part of
actions that can be made by government to take care of our property bubble. It is worth noting
that Bank Negara Malaysia continues to also try and drive the market’s direction with their
available stats.

In conclusion, none of the experts deny the possibility of upcoming housing bubbles. Moving
on, the economic fundamentals and political stability are the crucial factors. The government
should take some action to prevent these things happen. Every homeowners also should think
wisely when they want to buy property. All property investors should not just focus on
affordable homes as it might supress the low income person. It is also to take care of our
property bubble so our economic can be stable and better for our future.
 CLOSING

Generally, real estate bubble is a bubble in housing markets that are more critical than
stock market bubbles. The burst in real estate bubble damage many countries in this world
even Japan the most advanced country. The crash of the Japanese asset price bubble from
1990 on has been very damaging to the Japanese economy.

What happened in Japan give all homeowners in Japan experience in buying property
market. “The biggest lesson from Japan is not to fall into the same state of denial that existed
here,” said Yukio Noguchi, a finance professor at Waseda University

The number of homes being built and going on the market hasn’t increased with the
number of people wanting to buy a home. The result is that home prices increases. So, while
houses may be overvalued, the fact that supply had remained low should prevent a rapid
decrease in housing prices.

Right now, interest rates are still low. However, as interest rates go higher, being able
to afford a house won’t be an option for as many people. Thus, demand will shrink, and
housing prices will level off or drop. If all goes well, that diminished demand won’t disrupt
the market because of the tight supply. Steady growth is good for the economy, rapid rises
and falls are not.