Sunday, August 8, 2010

Reflection on hot issue: Malaysia housing bubble?....Part II

Detecting bubble is always difficult because it will always backed by compelling fundamental justifications/reasons. These arguments are very convincing, for most of the time. Are Malaysian property market in bubble stage? There are several indicators that could tell us that valuation is too high but difficult to tell whether we are in a bubble.

One of the very common indicators is price-to-income ratio. Since I can't find one for Malaysia's context, I am using Australian example here.

(Click on the chart to see the details)

As you can see in the chart, price-to-income of 3 - 4 times is okay.

Malaysian median household income of urban area is about RM 4,000 per month. Basing on price-to-income of 3 - 4 times, fair value of a double-storey terrace should be around RM 140,000 to RM 192,000.

Income per household could be too general and I feel it's a bit on the low side for Penang. I think a professional household in urban area would have gross income of RM 8,000 - RM 10,000. Based on this assumption, an urban fair value for a double storey property will be around RM 400,000-RM 500,000 max. The current price between RM 700,000 - RM 1,000,000 is pushing price-income ratio to 7 - 10 times. It's high!

The other indicator is debt-to-income ratio. The rule of thumb is this ratio should be below 0.30 times. Back to the assumption of RM 10,000 urban husband-wife professional household monthly gross income, the maximum monthly housing payment affordability should be around RM 3,000.

You can calculated your affordability by visiting this website:

(I avoided direct link to prevent abuses by crooks to redirect my readers to unauthorized website)

By punching in some numbers, you can see that the maximum property that a family with RM 10 k income can afford up to around RM 600,000. These assumptions are quite generous, for some reasons, the loan price war stop among banks and we are facing higher inflation, driving BLR to 7%, a fair value of a double-storey terrace will drop quickly to around RM 500,000. Anything above this value is speculative.

My other favorite chart is by just looking out for a hockey stick or parabolic rate of price change(see the US example).

If inflation adjusted price is too abstract to you, see USA major cities house prices in September 2005 when it was almost at its peak. The number was less than 1 million, looks very affordable but they did not know that they were in a bubble.

Basing on various models, I would say Penang island housing market is over-priced at least between 40 - 100%. The houses can remain over-valued for a long time as long as people still have their jobs.

1 comment:

yauwenchin said...

Very good analysis. You make a good financial analyst. You may consider your research for Part III on Bubble based on other factors: sentiment (optimism), liquidity, government policy (CGT, interest) and FDI and housing stocks (yoy), because although all these factors changes, it may have some correlation with property prices, while the normal ratio used are good