By Ernest Cheong
One month after the implementation of the Goods and Services Tax (GST) on April 1, we are beginning to see its possible effects on consumer spending and property prices and how these may adversely impact the Malaysian economy at this critical stage when the economy is entering a recession.
There is a perception among Malaysians that, be it a home, an office or a shop, property prices in Malaysia will continue to increase, thus putting pressure on younger Malaysians to rush into buying a property now before it becomes too unaffordable.
WHAT CAN MALAYSIAN FAMILIES AFFORD?
To find out what Malaysian families can afford, Table 1 shows the fortunes of three categories of Malaysian families in 2013 – the high-income, middle-income and low income families.
FAST FORWARD TO MAY 2015
During the two years between 2013 and May 2015, much has happened in the Malaysian economy.
Allowing for minimal increase in the cost of living of 5% per annum and the imposition of the 6% GST from April 1, 2015, the 2015 fortunes of the same three Malaysian families may be summarised as shown in Table 2.
POORER MALAYSIANS – 85PC OF MALAYSIAN POPULATION
According to a recent study, in 2013, Malaysian households in the Klang Valley have monthly incomes as shown in Table 3.
Based on the research, 85% of Malaysian families or 30.6 million Malaysians (based on a population of 36 million) have monthly household incomes of RM14,000 and below.
That means 85% of Malaysian families have reduced surpluses ranging from RM124 to RM1,194 per month.
FIRST ADVERSE EFFECT
Many of these families hold home loans to purchase houses at inflated prices during the five years from 2009 to 2014 when the Malaysian property market was subjected to frenzied and sometimes irrational speculative activities that subjected large numbers of younger Malaysians to rush to buy their dream homes then before it was perceived to become too unaffordable later.
Many of them, having committed themselves to service the monthly payments, with the increased living expenses, now find themselves in an unenviable position of not having money left to pay these instalments.
Within to the next twelve months, we can expect to witness a very sad and unfortunate consequence of the imposition of the GST in increased foreclosures by Malaysian banks against the large numbers of home loan defaulters who simply do not have money left to pay the banks.
SECOND ADVERSE EFFECT
According to the study, the reduced surpluses of the 85% of the Malaysian families are computated
without taking into account their monthly home instalments.
In order to save their homes and to avoid legal actions from the banks, many of these families would be compelled to resort to “domestic austerity” measures and avoid all non-essential expenditures.
They would almost immediately cut back on or eliminate altogether the Malaysian favourite pastimes of eating out or going to the cinemas. They would wear old clothes, mend old shoes and repair whatever else that can be repaired.
With such measures, the immediate casualty would be retail outlets and other businesses that depend on consumers’ patronage.
Since April 1, I have noticed a reduced number of visitors and shoppers in the many established malls in the Klang Valley, resulting in many of these outlets closing down.
Should this trend continue, there can be adverse consequences to the Malaysian consumer industry in particular and the Malaysian economy in general.
THIRD ADVERSE EFFECT
Following the shrinkage in the consumer industry, the next “casualty” would be “rentals” and “sale prices” of retail outlets in Malaysian malls.
Such a scenario is unavoidable because when the trend described above continues, more and more retail outlets in the malls would not be able to sustain their businesses and cannot find the money to pay their monthly rent from their declining sales due to their ever shrinking customer base. This will inevitably lead to more vacant premises when one by one the tenants stop their businesses.
Consequently, the entire mall business will be adversely affected when they are forced to reduce rentals, consequently leading to depreciation in the sale prices of these retail outlets.
FOURTH ADVERSE EFFECT
The negative effects on retail outlets and their subsequent reduction in rentals and sale prices that may eventually affect the entire mall may lead to other commercial properties like it did during the 1997/1998 Asian Economic Crisis when the entire Malaysian property market suffered.
CAN IT HAPPEN?
As I said in my previous article, the reality of a 2015 crash is already upon us. How every individual and every family responds to this reality will determine whether or not they will survive the crash.
Dr. Ernest Y Y Cheong is a Chartered Surveyor, Registered Valuer, Auctioneer, Arbitrator and Principal of Ernest Cheong PTL Chartered Surveyors.