Property Bubble

You can sit at our kopi tiams and argue till the cows come home about how big is the bubble in the local property scene, in particular KL and Penang. Its not even whether there is a bubble or not.

Just occurred to me that the best indicator of how frothy it is:

If a property developer buys the land, builds on it, puts in a 30% mark up and sells to you at RM700,000. That's already a fair transaction with sufficient profit for the developers. Three months down the road, the property is selling in the secondary market exchanging hands atRM1.1m.

Now who are the idiots, you tell me that the property developers do not know the real cost of building, developing and selling a property??? You tell me that these property developers would not want to sell the thing at RM1.0m to start off with??? If they sold at RM1.0m, they'd probably be raking in a profit margin of 50% ~ where to find such lofty profits???

The fact is these developers KNOW its already "fair" to make 30% and sell at RM700,000. In their hearts they do not even have the heart to try and sell at RM1.0m. But the secondary markets, are the buyers more talented and savvy in the know how of the actual cost of land, what it takes to build one, etc. ... noooo, but they can afford to pay RM1.1m for the thing that was going for RM700,000 a few months back.



Always regard a developers' selling price like the prices quoted to you by the Petaling Street hawkers. They already have ample room for profits. Would you buy something from Petaling Street for RM30 and then try to sell it for RM40??? I guess you would if you think there are other idiots very willing to buy at RM40.

A little speculation and premium is good. Capital appreciation is good. Profits and capital appreciation should be in the range of 8%-15% p.a. and NOT 30%-50% per quarter! The speculation has been especially rife with terrace and semis and newly launched high end condos.

Proposed Solution

Since there are so many bullish real estate salespersons and even more bullish property developers, why don't we start a OTC traded insurance instrument. Since the bulls are so bullish, let's allow for genuine property owners to hedge their assets.

Say you bought a house for RM700,000 last year and now has a market value of RM950,000. You should be able to get these property developers / banks / insurance companies to sell you a protection cover. For example if the market value falls back to RM700,000 over the next 3 years, they will pay you RM200,000. In exchange for that, you pay them RM50,000 as premium - easy just load up another RM50,000 onto your loan, but you will have enormous comfort. Since the developers and other bullish folks do not think prices will fall much, then just pocket the RM50,000 premium la (of course must put up the RM200,000 collateral).

Think along those lines and you should have a vibrant market that will allow people to bet and hedge. Measuring actual prices transacted within a vicinity will be the difficult part. But you solve that, I know you have hundreds of Desa Park City owners willing to part with paying RM100,000 premium provided you insure them that their house prices won't fall by RM400,000 within 3 years!