Malaysian real estate: How to know if the market is overheated or in a bubble?
I am also from Malaysia and I just purchase a property around Klang Valley area. Property market is just like share market. You will never know when is the highest peak point and when is the lowest peak point. Yes. Not only you, but everyone of us. What I would say that, just buy according to your need and your financial status.  If you feel that you need a comfortable place to stay rather than renting a room, and buying that property will not burden your financial status too much, why not go for it? The best time to purchase property is perhaps last year when world economic is down turn. But thing is over and can never go back. Since all of us don't have a crystal ball to tell the future, why not just act according to your heart and common sense (Buy according to need) ;) The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating. Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25. If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated.  This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.  P.S. if anyone can find this article for me I'd greatly appreciate it, I've tried to use my google-fu with googling terms with site:fool.com but haven't found the article I remember. FYI...during the housing boom here in the US many people spoke about ever increasing home prices.  Many thought home prices could never go down.  Until they did. If it seems like it is impossible for home prices to continue to go up then they probably will stop going up at some point, although the rising prices can continue for a lot longer than you think possible. I'm wondering if Malaysia is feeling the effects of the US FED which flooded the market with US dollars after the crisis.  The Malaysian central bank holds US dollars as its foreign exchange reserves.  In order to keep the ringgit from rising against the dollar the Malaysian central bank will print up ringgit to purchase dollars which suppresses the value of the ringgit.  This has the effect of artificially lowering interest rates as ringgits become readily available leading to a boom - the boom being in real estate.  Just a hunch. Is the dinar in Kelantan getting much attention in Malaysia?  This is starting to make a little news here. "I don't buy the ""house prices will always increase due to the increased cost of raw materials"" argument. In a lot of countries you will find that the cost of (re)building a property is substantially lower than its perceived sale value. If it wasn't, there would be no incentive for developers to take the risk of buying the land and building houses on it. Say the cost of building the house is 50% of the sale price (which might already be generous). Materials probably account for half of the building cost so you've got 25% tail wagging 75% dog? I'd start to worry if people buy property as a get rich quick scheme, which seems to be what you're describing." I think the only sure way to know if there is a bubble is to wait till it bursts and buy then. If it would be easy to tell there wouldn't be any bubbles.
Look. Here's a graph of the S&P 500. It's up 1200% since the start of the 70's, our late recession notwithstanding. You're not going to get that kind of return on bonds or commodities or savings accounts. (Maybe real estate stands a chance, if your real estate wasn't in, say, Detroit. It's not as easy to diversify real estate...) People in their 20's who have plenty of time before they need to spend their retirement money invest in the stock market exactly because they're long-term and can withstand these dips just by waiting them out, and earn a ton of money. People approaching their 60's transition their portfolio to bonds so that a market crash won't wipe them out. Book value = sell all assets and liquidate company . Then it's the value of company on book. Price = the value at which it's share gets bought or sold between investors.  If price to book value is less than one, it shows that an 100$ book value company is being traded at 99$ or below. At cheaper than actually theoretical price. Now say a company has a production plant . Situated at the most costliest real estate . Yet the company's valuation is based upon what it produces, how much orders it has etc while real estate value upon which plant is built stays in book while real investors don't take that into account (to an extend). A construction company might own a huge real estate inventory. However it might not be having enough cash flow to sustain monthly expense. In this scenario , for survival,i the company might have to sell its real estate at discount. And market investors are fox who  could smell trouble and bring price way below the book value  Hope it helps The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating. Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25. If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated. This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.  Additionally, Alex B helped me with two additional sources of information for this: Real Estate is local, all the articles here refer to the US housing market. Bankrate says purchase price / annual rate in the US has a long term average of 16.0. Fool says Purchase Price/Monthly Rent: 150 is good buy, 200 starts to get expensive This answer is copy pasted from a similar question (not the same so I did not vote to merge) linked here.. Given that hedge funds and trading firms employ scores of highly   intelligent analysts, programmers, and managers to game the market,   what shot does the average person have at successful investing in the   stock market? Good question and the existing answers provide valuable insight.  I will add one major ingredient to successful investing: emotion.  The analysts and experts that Goldman Sachs, Morgan Stanley or the best hedge funds employ may have some of the most advanced analytical skills in the world, but knowing and doing still greatly differ.  Consider how many of these same companies and funds thought real estate was a great buy before the housing bubble.  Why?  FOMO (fear of missing out; what some people call greed). One of my friends purchased Macy's and Las Vegas Sands in 2009 at around $5 for M and $2 for LVS.  He never graduated high school, so we might (foolishly) refer to him as below average because he's not as educated as those individuals at Goldman Sachs, Morgan Stanley, etc.  Today M sits around $40 a share and LVS at around $70. Those returns in five years. The difference?  Emotion.  He holds little attachment to money (lives on very little) and thus had the freedom to take a chance, which to him didn't feel like a chance.  In a nutshell, his emotions were in the right place and he studied a little bit about investing (read two article) and took action.  Most of the people who I know, which easily had quintuple his wealth and made significantly more than he did, didn't take a chance (even on an index fund) because of their fear of loss. I mean everyone knows to buy low, right?  But how many actually do?  So knowing what to do is great; just be sure you have the courage to act on what you know. No, there is no linkage to the value of real estate and inflation. In most of the United States if you bought at the peak of the market in 2006, you still haven't recovered 7+ years later. Also real estate has a strong local component to the price. Pick the wrong location or the wrong type of real estate and the value of your real estate will be dropping while everybody else sees their values rising. Three properties I have owned near Washington DC, have had three different price patterns since the late 80's. Each had a different starting and ending point for the peak price rise.  You can get lucky and make a lot, but there is no way to guarantee that prices will rise at all during the period you will own it. From then on we've felt he was really pushy and rushing us to make a decision (we need to lock in a good rate, its a sellers market, it'll go fast, snooze loose, etc).  This is the first reason for walking away. I understand that all those factors might be true but my question is: How do I know we made a good offer? I'm going to be blunt, here: You don't. You work out ahead of time what you will pay (ignore the agent) and you make the offer on the basis of your own research, research you spent months undertaking. The listed price on the location is $375,000 and according to our agent similar units over the last few years had sold for that amount. So our agent suggested making an offer at market price.  According to the agent. I'm going to be blunt here, what do any of the real estate sites out there - that offer a wealth of information for free - indicate? If you don't know, then yet again you don't know if you made the right offer or not. Do some research now by yourself. I would be shocked if your offer was at the right level. Set your emotions aside - there are a gazillion houses out there. well it 2008 was six years ago, over time we would expect some price inflation. however it's only really a good thing for people who already own houses (it increases their net worth on paper) and people who want to sell, and move to a cheaper area.  If you aren't selling, it doesn't help you much.   If you're a young person trying to get into the housing market, it's obviously bad. A housing market where young people can't afford to get in is unhealthy. If you already own, and you want to move up and buy a bigger house, that's hard if no one is willing to buy your existing house.  I don't know why the govt is helping create a new bubble. But, if the underlying issues that caused the last crash are not fixed, well... the bigger the bubble, the bigger the pop. "Ok, I stand corrected. Still... those papers are quite away from my field of expertise and I don't want to lose a lot of time learning all the financial lingo. I asked an easy question: ""Is this [the everything bubble] a thing or not?"" It seems that it's not, but I still wanted to know more about it."