Estate Market pulse

Is Malaysia’s Real Estate Market A Bubble?

Someone recently posted on Facebook that the Malaysia real estate market is nearing collapse, citing similarities with China’s real estate market amid an oversupply of inventory. Here are my two cents and reply to the author:

Why Malaysia Is Not China

Although the Malaysia real estate market may appear as risky as China’s, there are some differences/policies that are not common or practiced in Malaysia:

1. The China real estate market is highly concentrated, with a handful of developers commanding the majority of the market share. Unlike Malaysia, which relatively has a very fragmented market, risks are more spread out in case developers face delinquency.
2. Developers’ sources of funding in China are closely tied to the local government and its banking system. Case in point, the number one local government income source is not taxes but proceeds from selling land. This practice has its merits, particularly in raising large amounts of capital fast, but it may lead to systemic financial risk during market downturns. In contrast, most funding in Malaysia is channeled through private banking, primarily via loan arrangements (i.e. bridging loan) that involve a more stringent vetting process usually with equivalent collateral.
3. Third, although both countries practice the “sell-then-build” model, which poses certain risks if a developer goes bankrupt. However, Malaysia has a better system to address such risks with the introduction of the HDA Act, which requires a certain amount of deposits to be kept in a third-party government account. China has no such system. Malaysia learned its lesson after the 1997 Asia financial crisis. (Nonetheless, there is always a certain amount of risk under the sell-then-buy model)
4. Malaysia’s financial market is relatively more open than China’s. Meaning: Investors have wider options to park or invest their money in both local and foreign financial institutions. In China, the choices are limited (at least for the vast general public); Beyond real estate and the stock market within local institutions, alternatives remain largely the same. As a result, investment risk there remains highly concentrated.

Conclusion

There is more to this than meets the eye, but the above is sufficient to illustrate the differences between the two countries. That said, Malaysia’s real estate market faces its own challenges, notably oversupply, rising household debt, and an aging population, which may dampen long-term housing demand.

Nevertheless, a real estate downturn on the scale of China’s remains unlikely.