Prior to investing in property, we must be clear about what the purpose of purchase is? Is it mainly for your own stay or for capital appreciation?
There’s a very common belief that property prices continue to increase over a period of time. Is this reality or it is just a myth? Let’s look back at the past 8 to 10 years. Yes, the property prices then were relatively high and many investors made a healthy profit from it. Why was this so?
Industrialisation of Malaysia
When Malaysia was going through industrialisation in the 1980s to 1990s, there were many job opportunities created to meet the required strategy of high-tech and knowledge-based industries. These were created as a result of Vision 2020 which mainly focused on manufacturing and export.
As a result, many people moved or even migrated over to the main cities in order to take up jobs, eventually building up their own family there. This caused properties in these cities to increase in price, and over this period in time the population increased as well.
According to Macrotrends, the fertility rate in Malaysia has decreased from 2.029 babies per woman in 2007 to 1.976 babies per woman in 2020, a 2.61% decline in the past three years. A decline in fertility rate naturally will cause a reduction in population size, leading to a drop in demand for property.
Back in 1970, the fertility rate in Malaysia was 5.11 babies per woman, meaning a family would have an average of five children. By the time they were in their 30s and 40s, these children started to build their own family and needed their own space and privacy. Therefore, the price of property at the time was relatively high.
Imagine those five children branching out to five different families; naturally five houses are needed. Compare this with fertility rates today, with one or two children per family. When they start to build a family, only one or two houses are required in the future. Using this simple observation, do you think there’s an oversupply of property?
To Invest in Property or Not?
For most people in their 20s, they’re typically just starting their careers, either by climbing the corporate leader or by building their own business. There are many career opportunities as well as career uncertainties. These could include opportunities to work outstation or overseas, the chance to build up a business, or even searching for a different job.
If this happens and they have a property on hand, it’ll be a burden for them as this is a long-term commitment (20-30 years) that they’re liable for. In order to start up a business, they’ll need to be cash rich and free from any mortgage so that their business can be leveraged. A property would be a potential stumbling block and restriction for them to build their business. As a result, they may never get to grow their business the way they want to due to the high commitment to their property.
In addition, properties are illiquid assets that require at least six months to fully be transferred from seller to buyer. Furthermore, you need to consider the associated costs incurred when buying property such as legal fees, agent fees, interest expenses from the bank, and miscellaneous fees like management fees, quit rent and more. You don’t want to suffer a “triple kill” by the non-performing property and low rental yield due to a poor location, bank interest and miscellaneous expenses.
However, if the property is located at a strategic geographical location and the rental income is more than the required expenses, then it may be considered a good investment. Anytime you are required to take money out of your pocket, it’s actually a liability and not an asset. Of course, this is a different story if the property is for your own stay.
In conclusion, diversification is the key to building wealth. Don’t put all your eggs into one basket. There are many other asset classes that you can accumulate wealth from such as equities (stocks), mutual funds, bonds, Real Estate Investment Trust (REITs) and others. Why invest your RM500,000 into a single address when you can choose to invest in thousands of different assets or other fixed income instruments under a portfolio managed by professional fund managers?
About the Author
Michele Lee Kar Mun (FAR CMSRL RFP B. Sc Actuarial) is a FA Director, Licensed Financial Planner and Bank Negara approved Financial Advisor Representative. She is well-versed in advising clients about their personal finances and investment portfolios. She can be contacted at email@example.com