MM2H | Living in Malaysia

Excerpt from a speech by the Penang Chief Minister Lim Guan Eng, 19 April, 2012:

As a first step to protect the interests of local Malaysians, the state government is proposing to increase the minimum limit for foreign purchases of all properties from the existing level of RM 500,000 to RM1 million with a higher limit of RM 2 million for landed properties only in Penang island and retaining the present RM 500,000 limit for Permanent Residents.

In 2010 and 2011 there were 774 and 890 property transactions involving foreigners. These transactions constitute only 2.98% and 2.26% respectively of the total number of transations in Penang. However to protect the interests of locals to ensure that they enjoy priority for less expensive properties, this restriction will help to provide a level playing field since foreigners have the advantage of a higher currency.

The Penang state government stresses that we welcome foreign participation in our economy including our property market. The state government feels that foreign participation can be profitable to both Penangites and foreigners in the higher end market where they can add value by helping Penang to transform itself into an international and intelligent city.

We would like to get feedback and opinions from NGOs, property developers, foreigners and the public on this proposal. The state government hopes to implement this proposal the earliest by 1 June 2012 or the latest by 1 July 2012.

It would be good to know what percentage of the sales from RM 500,000 to RM 1,000,000 for condos, and RM 2,000,000 for landed properties were purchases by foreigners. But it seems like an overly drastic measure given a 2.5% rate of foreign purchasers. To slow the rise in prices I believe increasing the downpayment requirements (including the extremely minimal downpayment requirements on housing in the process of being built. To be effective this should be done on all purchases (not just foreigners).

Without more focused data on the foreign purchases in the ranges being targeted however it is hard to determine what the impact of any measure could possibly be.

Participants in MM2H (as well as permanent residents) are permitted to buy/own 2 properties at the RM 500,000 minimum level; which could definitely increase the applications for that program. That could be one of the reasons this action was taken.

See Topic: Penang Condos 2011 forum discussion of this topic for background information.

In general property prices can only support what local jobs support. So is Penang adding lots of jobs that can support costly condos? I don’t know, but am skeptical.

Penang may be a bit of an exception (as a “retirement local”). For retirement locations if you have a future stream of retirees then you can support higher prices than local jobs (this is riskier to rely on as a investor). Retirement locals that are cheaper than where those worked are coming from can seem cheap so those working elsewhere are willing to “overpay.” This could be the situation for Penang.

MM2H buyers don’t seem that can actually affect the market. Speculators are likely a big player. The smart public policy action in this case is to raise down-payment requirements and increase transaction taxes. This won’t stop a bubble from forming but will reduce the size of the bubble and limit the damage when it pops.

I wonder if a significant portion of demand (in addition to direct speculation) is Malaysians working in KL, Singapore, USA… buying a condo today that they don’t plan on living in for years. This can be a form of speculation but is a much more solid foundation for sustaining prices. If you have a high working income, purchasing a condo in Penang could be relatively cheap. If you are buying one, to rent for 10 years and then move back into you are unlikely to be harmed greatly when prices drop. Now some people will do this and see their first condo doubled in value and then buy two more, over-leverage themselves and have a great ride up the bubble and then get clobbered when the bubble bursts.

For the Penang area to sustain a long term boom, Penang needs to develop a sustainable long term pool of buyers. the safest way to do this is with lots of high paying jobs. That can be supplemented with some retirees (Malaysians and MM2Hers). To do either of these the government and developers must pursue strategies that attract these populations. There are other minor factors – you can have people making a lot of money buy a condo for their family or parents… But the only reliable way to sustain increasing property values is adding jobs and creating a pleasant living experience.

In looking around Penang me sense is that rental prices are very good (for renters). The available condos for rent seem to be quite high also. My guess is this is a sign of the large percentage of speculators/investors compared to those buying condos to live in themselves. This is a dangerous sign – when the market has more capacity than people (normally due to building more housing than the job market supports). My familiarity with the market is extremely limited however, my perception could be way off.

On the plus side the prices on a regional and global basis are reasonable. Therefor, those accustom to international prices can buy and feel they have a bargain. And this situation can support rising prices (especially if those buyers plan on retiring there – if they need to have a job there then it doesn’t matter how cheap the prices are if the jobs don’t exist). Buying with the hope that Penang is moving toward a prosperous future is reasonable. That is a bet that the island will add jobs and improve infrastructure to support a livable community that attracts people from all over Malaysia, and beyond. There is a great example of how to do this in nearby Singapore. If Penang take cues from many of Singapore’s wish moves investors could certainly be rewarded in the long term.

One significant risk to investors is the carry cost of their investment if the overcapacity (if there actually is overcapacity) continues over a long period. That will suppress rental rates. As new condos are added it also can reduce the attractiveness of your condo to renters (or future buyers).

Living in Malaysia

Tag Archives: MM2H

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