Investing In Property Can Be Rewarding, Here’s Why Millennials Should Approach It With Caution

Nobody has yet discovered when this longstanding principle of investment actually began, but it has come to be generally accepted that, after death and tax, you can never go wrong investing in property/land because their value will always appreciate.

Or is it?

With land becoming more and more of a scarcity and new properties becoming ‘leaner’ and more vertical, the prices of newly developed properties have also trajected vertically but not exactly leaner.

So much so that even the World Bank is saying that our houses are ‘severely unaffordable’.

Thus, one should really start and ask, is property investment really where I should be investing in 2018?

Unaffordable. Full Stop.

Using the Demographia International’s Median Multiple (MM) method of determining housing affordability, a house is considered affordable if it is less than 3x the household median annual income.

From 2014 until 2016, Malaysia’s median monthly household income grew by 7.62% from RM4,858 to RM5,228. That means an affordable house in Malaysia should be priced at maximum RM188,208 on average. But that is still well below the Malaysia’s average all-house price of RM387,258 at the end of 2016, according to statistics from the Valuation and Property Services Department (JPPH).

For the Bottom 40 (B40) household group, they can only afford houses which is priced at most RM108,000 based on their median household income of RM3, 000, whereas the Middle 40 (M40) household group can afford houses which is priced at most RM225,900 with a median monthly household income of RM6,275.

But they’re not buying for investment, they’re buying for dwelling

True, and although the current property industry in Malaysia is classified as unaffordable, comments should be made on the fact that Central Bank reported housing loan approval rate is actually a staggering 74.2% in Q1 of 2017 (RM22.3 billion to 90,137 borrowers), of which 72% are first-time buyers.

So even though the housing property scene is classified as unaffordable, the loan approval rate might suggest other inclinations. It seems that among younger Malaysians, there is a growing trend that buying a second property and renting it out is seen to be an alluring investment preposition as means for additional income.

But one should ask this question before deciding to invest in property: can the purchase of properties at this time guarantee substantial returns in the future?

Will properties continue to grow in value?

It is hard to forecast which direction the trend will go, but one thing is for certain, property prices will not go down because the developers are feeling generous to cut their profits and reduce their prices.

The only way that they can go down is either by being subsidised by the government (only to certain eligible group of buyers), or by leveraging a smarter and cost-effective construction processes, particularly the Industrialised Building System (IBS).

A number of private developers are already optimising the IBS system as quoted by Second Finance Minister Datuk Seri Johari Abdul Ghani.

“IBS is a technology which involves higher usage of machinery equipment; this could reduce labour cost in the construction sector.” – Datuk Seri Johari Abdul Ghani.

So, what now?

Especially for the millennials and young professionals, a shift in paradigm needs to happen. We can no longer view property investment as the holy grail of investments as there is no guarantee that properties will always appreciate. Putting a blind faith on any investments, particularly as substantial as property, is highly risky and plain irresponsible. Instead, we should be more financially savvy and have a different mindset.

A responsible millennial should approach property investment only after doing these 2 things:

1.  A thorough and proper research should first and foremost take priority in evaluating the property in terms of location, public amenities and transportation, road connectivity, nearest hospitals/supermarket, and other considerations.
2. A stress test should also be done on our ability to maintain the property in the event of a household losing half of its income, or finding a tenant at a lower rate than the mortgage, or rising interest rates. Would we be financially able to maintain the property under such scenarios?

The Conclusion? Be a responsible investor.

At the end of the day, nobody can really stop you from investing in properties. It is your hard-earned money and you have every right to utilise it however you want.

But the next time before you enter your car on your way to speak to a property agent, remember, what goes up must come down. That is a fundamental law of the world and certainly in economics and business cycles.

If property prices are going up, how far further can they amplify before bursting and come crashing down?

When that happens, do you want to be among those that says “Oh how I wish I didn’t invest in that property last year!”.

Or you want to be among those that say, “Eureka!”

It is your choice. Do your research, and choose wisely!

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