Malaysian real estate: How to know if the market is overheated or in a bubble?
I am also from Malaysia and I just purchase a property around Klang Valley area. Property market is just like share market. You will never know when is the highest peak point and when is the lowest peak point. Yes. Not only you, but everyone of us. What I would say that, just buy according to your need and your financial status.  If you feel that you need a comfortable place to stay rather than renting a room, and buying that property will not burden your financial status too much, why not go for it? The best time to purchase property is perhaps last year when world economic is down turn. But thing is over and can never go back. Since all of us don't have a crystal ball to tell the future, why not just act according to your heart and common sense (Buy according to need) ;) The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating. Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25. If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated.  This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.  P.S. if anyone can find this article for me I'd greatly appreciate it, I've tried to use my google-fu with googling terms with site:fool.com but haven't found the article I remember. FYI...during the housing boom here in the US many people spoke about ever increasing home prices.  Many thought home prices could never go down.  Until they did. If it seems like it is impossible for home prices to continue to go up then they probably will stop going up at some point, although the rising prices can continue for a lot longer than you think possible. I'm wondering if Malaysia is feeling the effects of the US FED which flooded the market with US dollars after the crisis.  The Malaysian central bank holds US dollars as its foreign exchange reserves.  In order to keep the ringgit from rising against the dollar the Malaysian central bank will print up ringgit to purchase dollars which suppresses the value of the ringgit.  This has the effect of artificially lowering interest rates as ringgits become readily available leading to a boom - the boom being in real estate.  Just a hunch. Is the dinar in Kelantan getting much attention in Malaysia?  This is starting to make a little news here. "I don't buy the ""house prices will always increase due to the increased cost of raw materials"" argument. In a lot of countries you will find that the cost of (re)building a property is substantially lower than its perceived sale value. If it wasn't, there would be no incentive for developers to take the risk of buying the land and building houses on it. Say the cost of building the house is 50% of the sale price (which might already be generous). Materials probably account for half of the building cost so you've got 25% tail wagging 75% dog? I'd start to worry if people buy property as a get rich quick scheme, which seems to be what you're describing." I think the only sure way to know if there is a bubble is to wait till it bursts and buy then. If it would be easy to tell there wouldn't be any bubbles.
"So I'm in Australia and we have our very own housing price/credit bubble right now (which is finally deflating) and I'll try explain it as I understand. I welcome anyone to chime in and correct me.  The problem we faced (still face to a large degree) is the idea of rising asset prices and how this fuels a feedback loop into increasing personal debt, all based on the false assumption that house prices always go up. Now before I continue, house prices *do* always go up in the long run, but so does the cost of everything and we call that inflation, adjusting for this effect usually reveals that house prices are cyclical in the long term and never really 'grow'. So that aside we in Australia recently saw a long period of increasing house prices (as did the USA and Europe, and more recently China), the thing about house price is it is your 'equity', I'll try and explain: (all figures are made up to provide a simple example) if you borrow $200,000 to buy a house that costs $250,000 you owe the bank 80% of the equity (what your home is 'worth', and notionally this is value that you own) in your home and the bank will be happy, remembering that they make money on your interest payments, not your principal repayments. If your house then increases in value to $300,000 but you still owe $200,000 then you now owe only 66% of your equity. The bank sees you as a lower risk and encourages you to borrow more to get back up to that sweet spot they had before of 80% - this is a nice tradeoff between risk and reward for the bank. You, the consumer, have just been mailed a new credit card with a 50k limit (hypothetical) and theres a new iMac being released next week, and you really did want to trade in your 5yr old car (see where this is going yet?). Not only is this type of spending given a mighty boost but consumers feel like this house thing has done them very well and suddenly they have the ability to borrow lots more money, why not get a second house and do it all over again? The added demand for investment housing drives prices, throw in some generous government incentives (here and in the USA) and demand is pushed hard, prices grow more and the whole thing feeds back into itself. People feel richer, spend more from their credit cards, buy another house, etc.  But what happens if your house 'value' then drops to $240k? The bank now sees you as a high risk, so do the bank's investors, you have negative equity, the bank demands the difference paid back to it or it might take your home. Somehow, nobody believed this would happen.  Hopefully you start to see the picture? In Australia we are now facing a slow melt in housing prices which has not yet hurt en masse but it has dried up the credit cards, retails spending has collapsed and everyone is worried about the future.  Now to realise where the USA got to you have to also understand that banks were not merely asking for a maximum of 80% owed on the asset, many of them let this figure go to 100%, since hey prices always go up, right? They then in some cases went further and neglected to look into your income and confirm you could even *repay* your loan. Sounds dodgey? This is just the setup.  Remember I mentioned the bank's investors? Well banks/smart people basically figured out a clever way of 'dealing with' the risk of a few outliers with bad financial situations by collecting large numbers of home loans into a single entity and selling it on. Loans were graded according to risk and I believe they were even cut up into smaller pieces (10% of your high risk loan assigned to 10 different 'debt objects' with different risk profiles). These 'collateralised debt obligations' were traded from one bank/investment firm to another with everyone happily accepting the risk profiles until eventually nobody knew what risk was where. Think about it like ""I'll throw 10 high risk loans, 50 medium risk loans and 40 low risk loans into a pot, stir it up and sell the soup as 'pretty safe' "". This all seemed like a very good idea until it gradually became clear just how much of these loans were in the 'extremely stupid high risk' category. This is probably extremely confusing by now, but thats the point, investors could no longer judge how risky an investment in a bank or financial institute was, the market did not correct for any of this until it was all too late.  The moral of the story is when people tell you an investment is guaranteed to make you money, you stay away from that investment. And to specifically answer your question you can't solely blame government incentives as you might be able to see, but they play a part in a giant orchestra, there are many factors that drive this sort of stupidity, stupidity being the primary one." "Perhaps buying some internationally exchanged stock of China real-estate companies? It's never too late to enter a bubble or profit from a bubble after it bursts. As a native Chinese, my observations suggest that the bubble may exist in a few of the most populated cities of China such as Beijing, Shanghai and Shenzhen, the price doesn't seem to be much higher than expected in cities further within the mainland, such as Xi'an and Chengdu. I myself is living in Xi'an. I did a post about the urban housing cost of Xi'an at the end of last year: http://www.xianhotels.info/urban-housing-cost-of-xian-china~15 It may give you a rough idea of the pricing level. The average of 5,500 CNY per square meter (condo) hasn't fluctuated much since the posting of the entry. But you need to pay about 1,000 to 3,000 higher to get something desirable. For location, just search ""Xi'an, China"" in Google Maps. =========== I actually have no idea how you, a foreigner can safely and easily profit from this. I'll just share what I know. It's really hard to financially enter China. To prevent oversea speculative funds from freely entering and leaving China, the Admin of Forex (safe.gov.cn) has laid down a range of rigid policies regarding currency exchange. By law, any native individual, such as me, is imposed of a maximum of $50,000 that can be converted from USD to CNY or the other way around per year AND a maximum of $10,000 per day. Larger chunks of exchange must get the written consent of the Admin of Forex or it will simply not be cleared by any of the banks in China, even HSBC that's not owned by China. However, you can circumvent this limit by using the social ID of your immediate relatives when submitting exchange requests. It takes extra time and effort but viable. However, things may change drastically should China be in a forex crisis or simply war. You may not be able to withdraw USD at all from the banks in China, even with a positive balance that's your own money. My whole income stream are USD which is wired monthly from US to Bank of China. I purchased a property in the middle of last year that's worth 275,000 CNY using the funds I exchanged from USD I had earned. It's a 43.7% down payment on a mortgage loan of 20 years: http://www.mlcalc.com/#mortgage-275000-43.7-20-4.284-0-0-0.52-7-2009-year (in CNY, not USD) The current household loan rate is 6.12% across the entire China. However, because this is my first property, it is discounted by 30% to 4.284% to encourage the first house purchase. There will be no more discounts of loan rate for the 2nd property and so forth to discourage speculative stocking that drives the price high. The apartment I bought in July of 2009 can easily be sold at 300,000 now. Some of the earlier buyers have enjoyed much more appreciation than I do. To give you a rough idea, a house bought in 2006 is now evaluated 100% more, one bought in 2008 now 50% more and one bought in the beginning of 2009 now 25% more." Since 2008, when it all came crashing down, I read a variety of solid data sources that said this asset bubble and mortgage/HELOCs were going to reset (blow up) in slow motion for years, maybe decades. Nothing changed from that time. This has been happening for hundreds of years from what I understand now. Long story short, we are currently in a set of asset and credit bubbles across many financial asset categories, driven by the tremendous amount of liquidity created by central banks with 0 interest rates and quantitative easing since 2008. The bitcoin bubble is pure financial speculation, a price increase in the thousands of percents is unsustainable. And the stock bubbles are enormous and exist across all major US indices, and indices abroad like the Nikkei 225. No, it is not true. It depends on the market, the banks' inventory, the original debt that was owed, etc etc. The banks generally want to recover their money, so in case of underwater properties they may end up hold a property for years until prices bounce back (as it happened during the last crisis when many houses were boarded for months/years until banks put them back on the market hoping to sell at a price that would allow them to recover their losses). The behaviour described in this article was fraud and deception to work around regulations that would have kept the bubble from overinflating. If the housing bubble had stopped when they ran out of genuine loan prospects it would have been a lot less worse when it popped. Nah, this is a fluff piece designed to get people excited about real estate.  A good rule of thumb is that if a piece has a National Association of Realtors quote in it, it's good odds that that it's trying to promote buying and/or selling real estate and trying to get people excited about real estate.  If there's actually a shortage of supply relative to demand, which is what matters, I'd expect to see Case-Schiller housing price index increases (not just median sales price increases, which I see quoted a bit, as those are affected by what type of house is selling in larger numbers).  Let's go back and look at [YOY Case-Schiller for Los Angeles](http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----).  Yup, looks like Los Angeles has seen a 4.8% drop over the course of the last year in the index.  Not exactly the sign of a booming housing market. I think one of the problems is bubbles convince people that they aren't in a bubble. Happens over and over and over. People standing back and saying, you know this might be a bubble get ignored most of the time right until it is too late.   There have been bubbles for a loong time and in so many things it seems silly that people don't spot them near immediately. Don't over analyze it - check with some local landlords that are willing to share some information and resources  Then analyze the Worst Case Scenarios and the likelihood of them happening and if you could deal with it if it did happen Then Dive In - Real Estate is a long term investment so you have plenty of time to learn everything..... Most people fail.... because they fail to take the first leap of faith !!! Boom-bust economic cycles and asset bubbles have been happening for hundreds of years. And they take years or decades to work out, eg Long Depression from 1870-1890. Nothing is different this time.   Therefore I am surprised people think the housing recovery is right around the corner. I don't think the conditions exist for the type of housing recovery people expect.   Asset bubble, high unemployment, low wages and aging work force = economic stagnation. Maybe for the rest of my working life. "Canadian bubble is in a weird place.  The problem with the market is it doesn't take into account the increase in quality.  I lived in one of the frothiest places on the north side of Toronto.  When I first moved their the same bungalow that sold for $1mm + was about 400-450k.  What they don't mention in those articles is that there is a fair amount of LAND, and that the new owners will tear it down the day they take possession, and build a really large home on it.  That is why you see single dethatched homes in Toronto outpacing condos by a huge margin.  (or one reason anyway.  we have our green belt/intensification issues, and in Vancouver, they have natural intensification issues thanks to the mountains and the ocean.)  All that said, I was pretty sure I had bought at the height recently, but lo and behold prices continued to rise.  I think the only thing that will ""save"" us is the insured mortgages.  I mean there will be write offs, but not like what we saw in the US, as Canadian banks/and FIs are much more conservative.  I think China is the wild card in the Canadian RE market, at least on the condo side.  We don't have any good statistics about how many investors are off Canadian soil." So after you learn some basics about bubbles you might then see that interest rates kept at their lowest since the days they were backed with gold may allow a bubble to form in housing.   You know the bond purchases increased real estate prices right? What is it about the magic $2 Trillion that makes you think the FED hit the spot right on? There's probably no simple answer, but it's fair to say there are bad times to buy, and better times.  If you look at a house and see the rent is more than the mortgage payment, it may be time to consider buying.  Right now, the market is depressed, if you buy and plan to stay put, not caring if it drops from here because you plan to be there for the long term, you may find a great deal to be had. Over the long term, housing matches inflation.  Sounds crazy, but. Even into the bubble, if you looked at housing in terms of mortgage payment at the prevailing 30yr fixed rate and converted the payment to hours needed to work to make the payment, the 2005 bubble never was. Not at the median, anyway. At today's <5% rate, the mortgage will cost you 3.75% after taxes. And assuming a 3% long term inflation rate, less than 1%. You have expenses, to be sure, property tax, maintenance, etc, but if you fix the mortgage, inflation will eat away at it, and ultimately it's over. At retirement, I'll take a paid for house over rising rents any day. Yes, this phenomenon is well documented.  A collapse of an economy's exchange rate is coincidented with a collapse in its equities market.    The recent calamities in Turkey, etc during 2014 had similar results. Inflation is highly correlated to valuations, and a collapse of an exchange rate is highly inflationary, so a collapse of an exchange rate is highly correlated to a collapse in valuations. Stocks, gold, commodities, and physical real estate will not be affected by currency changes, regardless of whether those changes are fast or slow.  All bonds except those that are indexed to inflation will be demolished by sudden, unexpected devaluation. Notice: The above is true if devaluation is the only thing going on but this will not be the case.  Unfortunately, if the currency devalued rapidly it would be because something else is happening in the economy or government.  How these asset values are affected by that other thing would depend on what the other thing is.  In other words, you must tell us what you think will cause devaluation, then we can guess how it might affect stock, real estate, and commodity prices.