Why does a property sell at RM1.6mil when almost everyone living there
can at best afford only RM800,000 or sell at RM800-RM1,000 per sq ft
when up to a short while ago the maximum was only RM350 per sq ft?
Can 350 new properties in a scheme sell at the same price as one single
latest transaction of an existing property in the vicinity? Can 10
developers sell 350 new properties each based on the abovesaid one
single latest transaction?
Let’s take a look over the last 30 years at how properties had been
priced in the market. Subang Jaya would make a good starting point.
In 1980 when I first started working, I noted that the latest phase of
the new single and double-storey terrace houses in Subang Jaya were
priced at between RM90,000 and RM140,000 per unit respectively, up from
their previous pricing of between RM60,000 and RM90,000 in 1979. The
1980 pricing echoed the newly revised housing loan amounts of Division 2
and Division 1 government officers. All the launched units were quickly
sold with the new and huge demand. In the subsequent phases, the
pricing followed the momentum of the earlier fully sold sale prices with
additional premiums for time, newer design and specifications and
variations in the floor and land areas.
Then in the 1990s in the condominium city of Mont’Kiara, I noted the new
condominiums were priced based on the price range of the existing
two-storey terrace houses in Sri Hartamas/Desa Hartamas which were no
longer being built due to land shortage and high land prices. The new
condominiums provided an ideal alternative for the affluent younger
Malaysians who were seeking a lifestyle change. The prices were also
influenced by foreign buyers who preferred a new property with security
and property management services at prices and rents which they could
afford.
When the number and type of foreign buyers and tenants increased, the
developer started to build larger units which were priced based on the
price range of semi-detached and detached houses in the neighbourhood.
This was well accepted by the market as it was based on actual demand
for new, secure and well managed properties by foreigners especially
since there were two international schools in the vicinity.
I also noted that in pricing the newly-launched terrace houses in the
mid-1990s in Bandar Utama, the prices were 10% to 20% lower than the
last transacted prices of existing comparable houses in the same
neighbourhood such as TTDI, Damansara Jaya and Damansara Utama. Here the
rationale was that the price of the newly-launched house should reflect
a discount compared to an existing property, to take into consideration
the 2-year waiting period during which interest has to be paid to the
bank and rents have to be paid to stay in the current accommodation. It
is interesting to note that this rationale is no longer followed by
developers and their marketing gurus who now price the newly-launched
schemes at higher prices than the highest sale price of an equivalent
existing house. The basis being, “why not” when everybody wants to
invest in properties and loans are easy and cheap.
Pricing trend
Another pricing trend noted was the continuous rise in the prices of
shopoffices in Bangsar and Desa Hartamas, etc. Here the price rise was
directly influenced by the rentals paid for the ground floor retail
units which were in high demand by food and beverage outlets. This trend
continues in all the new smaller shopping complexes as well, where the
food and brewerage (F&B) outlets form the largest composition of
tenants. The reason they can pay higher rents is because there are a
large number of people/small entrepreneurs who find this sector the
easiest to enter or invest in, as the payback period is only a short 3
years and there are no barriers to entry.
The other occupiers of the shopoffices and small shopping complexes have
no choice but to cough up the same rent as the F&B outlets, as they
set the “tone” for the rent in that particular row of shops. As the
rents rise, so will the prices as they are directly related.
Similarly, properties in areas which can be converted to a different use
where new demand is being created such as showrooms, bridal studios,
etc can afford a higher rent. Prices rise due to the higher rents paid.
Then by way of the much misused comparison method of valuation, other
properties in the vicinity also rise in price, irrespective of their
current use, rent and turnover.
I note that in highly popular areas where supply of a particular type of
preferred property is limited, like in Damansara Heights/Bangsar etc,
the number of transactions per year is very limited as no one really
wants to sell since there are no other similar alternatives to move
into. Then when out of the blue, a unit here is advertised for sale
(usually because the owner is migrating or just wants to test the
market) a “special purchaser” will come along and easily pay 20% to 30%
above the last transacted price to secure the unit. This is repeated in
the next sale when the second “special purchaser” pays another 20% to
30% above the last special purchaser price.
After two such transactions, the price paid by the “special purchaser”
becomes the market price and extends to all other properties which are
considered comparable, such that the price is now beyond the capacity of
the people who have always lived or traded in that vicinity.
The price here is based more on the price which someone living or
trading elsewhere is prepared to pay. This is what is happening in
Singapore, London, etc. where foreign purchasers set the price. In
Malaysia this is happening in Iskandar, KLCC and Penang.
Prices are also directly influenced in the following manner. Say a
typical terrace house in a locality measuring 20’ by 60’ and 20 to 30
years old, is fetching prices in the range of RM350,000 per unit. A new
scheme comes up in the area where the new unit measures 24’ x 80” and is
of modern quality. Here the two properties are not comparable in terms
of size and quality. The new unit is priced at say twice the price of
the older smaller unit (based on cost, floor area and land area) and
sets a new price benchmark for that locality. Then in a matter of time,
all the existing properties in the vicinity (particularly all those that
have been renovated) try to adopt a similar selling price per sq ft as
the new property, using the location, location, location theory, never
mind that upon purchasing the older property, the new buyer has to spend
a hefty sum to make it livable to modern standards.
Then there is the effect of the policies of the lending institutions on
the price. The policies of the lending institution in respect of loan
tenure, interest rates and the loan to value ratio directly influence
the pricing of a property. During a period of high confidence, sellers
can quote high prices just to test the market, but as long as the
purchase of the property can be financed, the buyer is prepared to pay
the higher asking price as the loan is spread over 20 to 35 years and
almost 90% to 100% of the purchase price can be financed.
And all it takes is for one property to be sold and financed at the
newly tested price and the new price level will then be tested even
higher with the next lending institution. This is particularly true for
new types of properties which the buyer and lending institution cannot
compare with an existing property.
The above real examples clearly indicate how properties have been priced
by the market. It is noted that despite property being a long-term
investment and outlay, the market’s pricing mechanism is very short term
and dynamic particularly when moving upwards. The prices being set by
the market in the short term may not always equate with sustainable
market values. It is a strong probability that if one blindly follows
the pricing set by the market during a very short-term dynamic cycle,
life can become one of endless and needless debt.
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