Be prepared for property bubble burst, Ideas tells govt

The government must be ready for the property market bubble to burst, and the risk of it leading to an economic crisis, said the Institute for Democracy and Economic Affairs (Ideas).

Ideas senior fellow Dr Carmelo Ferlito (pix) in his policy paper titled “Affordable Housing and Cyclical Fluctuations: The Malaysian Property Market” recommends that the government respond with market-oriented solutions and pay special attention to the household financial exposure.
“Second, the government needs to downplay its role in the property market by reducing the number of government agencies and encourage the private sector to get involved in the affordable housing market.

“Third, the government must enhance Malaysian financial literacy, with an orientation toward the value of saving and the possibilities offered by the rental market,” Ferlito said in a statement today.

He said the government may also open and ease up the regulation in the property market for foreigners who are in possession of a regular working visa and are paying taxes, to help the industry.

Ferlito’s policy paper highlights the evolution of the Malaysian property market over the past decade, which has resulted in a high number of unsold properties, especially in the high-end segment, and a partially unsatisfied demand for affordable housing.

He said the spectacular growth of the high-end property segment was ignited by rising profit expectations supported by a growing demand and, at a later stage, by a supportive credit market.

The mix of these elements has generated a bubble which, following the property transaction dynamics, reached its peak between 2012 and 2013, and that bubble is now expected to burst.

Ferlito noted that the focus on the high-end segment was justified 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.”

He added that the high involvement of government agencies in the affordable housing market risks crowding out private initiative and prevents the necessary restructuring from taking place.

“It is important to let the bubble burst; too much credit will only delay the bursting, keeping prices artificially high and putting at risk the financial solvency of buyers. Without credit support, the crisis will happen faster and force both capital restructuring and prices to move downwards,” Ferlito said.