Are we in a property bubble?

My friend called and told me how the house she wanted to buy was sold out from the developer within hours. A few weeks earlier, a family friend managed to buy a newly developed house in Bangi, but only after camping from 9 pm the night before to get in the queue. Both houses were priced between RM400,000 to RM500,000 - that's half a million buckeroos!

 

The question is are we in a bubble? Is the house price fueled by demand or speculation? Well, If I know the exact answer to that I would be slogging my butt off at work, would I?

In my view, a bubble in property is when the price far exceed its value. We know the prices based on the transacted amounts which has been going on. But what is the value of a house, a shoplot or an office, really. I just want to look at the house, a dwelling for humans.

What is the value of a house to you?

Well, firstly value is not exact and differs from one person to another. Each has a different cost (of acquisition) and discount factor to a particular property. There are sentiments attached to it. Location, convenience and incidental costs (transportation and time etc) play a role in determining a value of a property to a person. It is important to understand this because 'value' will determine the price he is willing to pay.

Expectation of resale price is also important. On this note I want to stress that value and price are two almost completely, but (most of the time) related thing. Value is an imagination but price is real.

In my book, a bubble is when value - calculated as a function of (1) the real ability to pay based on income and bank loans as well as (2) the alternative cost or opportunity cost being rental rate ( people still have to live somewhere).

So if the demand is coming from people who plans and has the ability to pay - then there is no bubble; merely inflation. Even if someone buys a property for speculation, but he has the means to maintain the loan, then he would not be be in a desperate sell situation. But if the economy suddenly turn for the worse or the banks pull back (significantly) the supply of capital to buy the houses- then you will see a crash.

Anyway, that is my random thought on this glorious Saturday morning.

Have a good weekend friends!