Appendix A

UNIVERSITI TUNKU ABDUL RAHMAN FACULTY OF SCIENCE ACADEMIC YEAR: 2010/2011 JAN 2011 TRIMESTER UEBE2513 ECONOMICS OF THE CONSTRUCTION INDUSTRY ASSIGNMENT COVER SHEET Subject Code: UEBE2513

Subject Title : ECONOMICS OF THE CONSTRUCTION INDUSTRY Course : Bachelor of Science (Hons) Quantity Surveying

Assignment Details: Article review on The Great Asian Bubble Lecture: Ms. Zuriati Ashaari Group leader: TEO ZHIAO VIN

Students Name TEO ZHIAO VIN CHANG YI HUI FOONG KAH YEANG WANG HUI ZHEN LAW CHUNG HING ONG HAN TSEN

Student ID No. 1001110 1001087 1002348 0904557 0808003 0903071

Assignment Overall Marks:

Marks

Table of Content 1. 2. 3. 4. 5. 6. 7. Introduction: Property Bubble.3-4 pg Causes of Property Bubble...4-5 pg Impact of Property Bubble....5-7 pg US property bubble vs. Financial Crisis7-9 pg Asia housing bubble..9-13pg Malaysia property bubble..13-16 pg Reference...17-18 pg

Introduction: Property Bubble In this article review, I will first explain in briefly on the definition of property bubble, the process of property bubble forming, and its impact on construction GDP. After knowing the process of property bubble, we will go further by finding the causes of property bubble and its impact. After knowing the whole concept, we will look onto the USA property bubble that leads to world financial crisis, Asia housing bubble and Malaysia property trend. In the article The Great Asian Bubble mentioned on the Asian property bubble and property trends. It draws out the table to show the property price in USA, China, Hong Kong and Singapore in year 2007 and 2008 for compares. It also show the property price trends in Asia and the idea of several economist on Asia property trends, each economist have different opinion on the raise property price in Asia, yet the raising rate of property has given alert to the government in Asian countries. In this article, property bubble is the main topic, yet what is property bubble? Property bubble also commonly known as housing bubble and real estate bubble is one type of economic bubble. Bubble is an unhealthy climb of property price due to investment of housing, and the price will rapidly increase to a level that is unsustainable. Bubble is often featuring the housing price too high that it did not reflect the real value of property, instead it reflect the expectation gain based on recent history. Besides, property bubble is a process and this whole process end with the price of housing drops and appears the hidden value of the property. Process of property bubble is normally start with increasing value of houses and many people want to buy house for investment, by means a high demand in houses, thus causing demand to be overload and housing supply become limited. As the construction industry saw the business opportunity in that certain time, they built lots of houses at once. But it will reach to a certain point where too many houses was build, but no one need or want a house anymore, means the demand drop with over sufficient in supply, the value of houses drop tremendously. As housing value fall, no one is going to invest into property again, and those new build houses will be left empty. However, those who have bought those houses earlier with mortgage loan, and still paying the interest will be wonder why they still pay an interest rate where the current house value is lower than their current payment, this will leads consumer to

leave the house and stop paying the bank. Hence, bank will be full of debt due to zero input of cash and the bubble eventually burst after some time. When the property bubble burst, bank will not be the only industry that being affected. Property bubble also left big impact on construction Gross Domestic Product (GDP). In GDP, market value is one of the aspects. When bubble in the way to form, the value of house increase, thus increase the construction GDP. However, when the property bubble burst in once, the construction GDP drops due to the drops of houses value, this also reflect that there is low in consumption expenditure. After knowing the process of property bubble form, next we will look on the cause that leads the process of property bubble. Cause of Property Bubble As mentioned in previous, real estate bubble or property bubble is a type of economic bubble which is trade in at the high prices that are considerably at variance with the intrinsic value and also in the product or assets with inflated values that occurs in local or global real estate market. In other means, it is characterized by rapid increases in the valuation of real property such as housing until they reach unsustainable levels and then decline. The first factor is the bank generosity to lower the interest rate. A lower interest rate and lax lending habits, which giving people more credit, caused property prices to escalate as demand increased. One of their concerns is that easy credit has increased the amount of liquidity in the market which is the annual percentage change of the price level, would result in inflation. Moreover, with the same factor, investors will take this golden opportunity to borrow money from the bank to invest more on houses because the banks own capital has decreased. It would have been a great help to those poverty-stricken people to buy their own real estate. But sadly, if this occurs continuously, the demand of houses will increase simultaneously; not to mention the supply of house will get lesser; hence property bubble exists in no time. Therefore, lower interest rate in loans will also link to another factor that causes property bubble to occur.

Which is the second factor that consumer buy property for investment not for living. In pass time most of the people having the wrong idea on property that property value will only increase and will not decrease, therefore when human thought that property only earns and no loss, and with the low interest rate, consumer will think that the cost for buying property is reduce and everyone will start to buy property for investment instead for living purposes because their mind thought is that by using low cost to earn increasing profit. As everyone is buying property for investment, means that 1 people may owns 2-3 houses in a time, as demand increase, sales of property increase, markets have to be alert because this is the sign of property bubble to happen because as property in hand increase, the interest rate have to pay also increase and sometimes, people tends to forget their affordability and might turn out easily when they found out they cannot paid the interest rate anymore. Third factor is bad lending practise. A bad lending practise which say that the bank lends the loan to a person which is irresponsibility or someone which have no prove of income statement which shows they are affordable to pay for the house. But the question comes, why would bank do so? This is because when it reach a point where everyone that qualify to get mortgage has already buy a house and bank want to attract more customer to buy property to earn from the interest rate, they start to add risk in to the mortgage plan, by reduce most of the procedures like no down payment, no need proof of income and no need document at all. This way, the bankers do attract lots of customer, but at the same time they also attract those customer which is irresponsible and some unaffordable to pay due to low income. This is forming property bubble to happened because it hidden a big risk. This is because these types of customer are very easy to turn out when they cannot afford the property anymore, and the bankers will be full of unclear mortgage and the property bubble will burst when bank also bankrupt like Lehman Brothers Bank. However, this three factors will not gave any negative impact if the bubble did not burst, in fact it will be seen as property blooming, but when this bubble burst, what impact will it gave? Impact of Property Bubble In housing bubble, it is accompanied by a drop in housing construction. This has been the case in the United States since the first and second quarter of 2007 in the

article given. The point to emphasize is that the bursting of a real bubble can have much more serious effects than the bursting of a stock exchange bubble. Housing bubble may bring effect to overproduction of any commodity and overproduction will leads to a fall in the price of the commodity. When there is overproduction, the price of the product will drop, which means that the supply of the product will be decreasing due to its remunerative to offer the product. On the other side, there will be more demand for the product because the since the price drop, there are more people are interesting or have the ability to buy for the product. In the case of real estate, these two effects take a very long time to appear because it is impossible to reduce offer immediately. For example, any building project which has been started will have to be finished, or else all the money invested in it will be lost. This means that new housing property will continue to arrive on a market that is already congested, making price fall even further. Apart from overproduction, housing bubble also bring financial effect to the nation. As a general rule, it is almost impossible to buy a house without a loan. The amounts concerned are too important for a household to be able to play in full. So, whenever there are difficulties in housing construction, they are bound to have effects on the financial sector. Therefore, banks or some institutions are granting those loans to people who have financial problem on owing the house. These institutions or banks can in their turn borrow from others and refinance them to make profit from the interest rate. If these institutions or banks, enticed by higher interest rates, have authorize these loans to those not very solvent households, the lending institution will collapse and it can take down with it the institution that refinanced it. This is what is happening in the United States, where 84 mortgage credit companies went bankrupt or ceased completely or partially their activity between the beginnings of the year. The effect could even affect banks which do not grant mortgage loans, because banks lend to each other. If a bank has serious difficulties in real estate, another bank which does not could in its turn become suspect, if it had lent a lot of money to the first bank, which would perhaps not be able to repay it and this may lead to a financial crisis.

Besides the financial effect, the housing bubble may also lead to unemployment. While the bubble burst, the building industry is already making massive lay-offs, to which have to be added the risks that are weighing on investment by companies. All this will lead to a rise in the rate of unemployment and in the fear of unemployment, which are all things that can negatively affect consumption. Furthermore, property bubble also effect on economy by the blooming of property price, there is an increase in the real activity as investment on new house and any activity relates to housing also found business increase. Therefore, this increase the job opportunity in housing industry and investment also creates more economic activity. But in this period, resources will be given to sufficient the usage for extra housing activity, means that other sectors will be less activity due to the limitation of resources. When the property bubble burst, everything will be reverse. Another effect is on household wealth and hence consumption. When the property value rise, those owners who owns a house will feel they are richer. As the wealth increase, the consumption expenditure will increase because they have more income. They can either saving in bank can be lesser or they can refinance their collateral loans and earn through the increasing the equity by using the banking and financial system. Consumers using this equity extraction for investment in activity, extra spending or both, this reflects a healthy cash flow in the market system. However, if the property bubble burst, all these effect will go in a reverse way. Consumers feel less wealthy, thus cut back spending. Investor, now facing low capital earning will shift their interest to other assets. These assets could be domestic or overseas, or both. When the investment is shift to overseas assets, these will creates changes in current account balances, exports and imports, and real exchange rates. These impacts from property bubble burst will then effect on real activity. As a conclusion, when there is bursting of housing bubble, the economy may go into recession and the impact would be very great for the entire nation just like the financial crisis due to US property bubble. USA Property Bubble vs. Financial Crisis Property bubble is an economic problem that affected many parts of the US housing market. The housing price in US reaches its peak at 2006, causes the market

to expand at a fast rate. But all of a sudden, the price started to decrease and has not reached its bottom yet in 2011. It is expected that the housing price will still continue to drop. This economic downfall had created lots of unemployment in the US and after all what is the connection of US property bubble with financial crisis?

The graph shows the price of houses in USA reached its peak at around 2006 and fall dramatically afterward. From the report of Factbox: GOP report cites 10 causes for financial crisis [online]. (2011), it list out 10 causes that cause financial crisis, and the result shows that 6 out of 10 causes is due to housing bubble in US. First cause is the credit bubble, that it is very common in US housing market because the bigger banks from Wall Street. They borrows huge amount of money from banks from other countries to buy in many mortgage from different money lenders and then divide the mortgages collected into different parts. They call it the collateral debt obligation (CDO). The CDOs is then sold to the investors group. Now, the investors get their profit through the interest they collect from the house owners. As the sales of houses increases, the price of the house increase too. This allows all the parties above to earn a huge amount of money. But, they forget that every debt involves risk, because when 1 house owner stop paying interest, it will be no effect on this chain, but when many of the owners stop paying interest due to the property value falls, this cause big problem, because they will have no input of cash, and yet still have abundant of debt due to borrow money from others country banks.

Second is the housing bubble. Housing bubble can be conclude by the fall value of property and hence link a chain reaction and last cause the financial crisis to happen. Third is Subprime lending. Subprime Lending can to be say approved mortgage to those owners which is irresponsible and without any proof of income. A cheap credit poor regulation, weak disclosure standard and unwitting rule easy for lender to issue mortgage but will easily never get repaid. Subprime Lending cause to amplify the housing bubble. Forth is bad risk management, those investors group is poor in risk management, they buy in lots of mortgage without identify the future housing value in market. The bankers having bad risk management, because they introduce the subprime lending by increase the risk that they might not get repaid due to the irresponsible of lenders. Fifth is too little capital, when the lender in subprime lending quit to pay interest, there will be no capital for brokers, bankers and investors group because the capital they earned earlier has used to borrow loans from others banks to buy several mortgage and now the lenders quit, they will have no input of capital. Without capital, firms hard to survive in short-term run. Sixth, coincidence. Firms failed around the same time because having the same problem. In the property bubble chain, firm that will be effect is the Wall Street banks, brokers and investors group. Therefore as the bubble burst, all firms involve in this chain will face failure because lack of capital to operates. As we see how US property bubble leads to financial crisis, now we should shift to Asia to looks on it property trend, how it rebound from the US financial crisis and the suspicious of Asia housing bubble. Asia Property Bubble Based on the article, we can get a rough picture on the Asia property market in terms of their trend, particularly the tendency towards the housing bubble, as well as the Asia speedy recovery and implications/measures for the rising property prices.

The Asian countries have a fairly good recovery in their economy from the U.S financial crisis that occurred back in year 2008, even though they were badly affected, especially for trade dependent country like Singapore. However, below are the Standout Economic Performances in 2010:

China surpassed Japan as the worlds second-largest economy. India grew at 8.2 percent in 2010, (even stronger than the 7.5 percent predicted in last years In Asia forecast).

South Asia as a whole performed well in 2010, growing at 7.8 percent. Southeast Asia grew at 7.4 percent. East Asia grew at 8.6 percent.

From the abovementioned points, it clearly shows the resilience of Asia property market. So, we might ponder how the Asian countries rebound from the US financial crisis. Despite of the speed recovery, Asian countries have also caught the international attention due to their growing housing bubble in recent years. However, Asian countries are also strongly believe that the panic not yet in order. First of all, there are a few reasons that the Asian countries make an impressive rebound from the US financial crisis. The East Asians have a good saving habit in comparison with the Americans which is shown in the article, Average saving rate in East Asia is around 35% of GDP... . As we know the financial crisis makes the property prices drop drastically, to cure this situation, the East Asian countries coupled the fall in price with lower interest rates to attract more property buyers. Since East Asians are with good saving habit, people with more cash will be approved by the bank for housing loan more willingly. Thus, it gains a great flow of customers into the property market and prospers it again. So, we can conclude the reasons are first, drop in property price, second, lower interest rates and third, good saving habit of East Asians. The last reason of the great rebound is that the East Asian governments quick policy responses, they have taken measures and restrictions to deal with such disaster. In fact, they also imply this measure to limit the growing housing bubble too. Unlike the American government, Alan Greenspan (Chairman of Federal Reserve of United States) did not foresee the coming of housing bubble and even created a very low interest rate which is 1% which in turn caused a rampant

growth in the investment of real estate property. U.S banks also lent money to basically everyone, without bothering if their income can afford the houses or not. This is called lax lending habits. East Asian countries are totally different from that, more examples of the measures taken by countries like China, Hong Kong and Singapore will be cited in the next session. Next question is whether really the panic of Asian housing bubble is not yet in order? There are a few evidences will support the answer YES, that the East Asian countries have good control over this housing bubble and therefore, the panic is not yet in order. First of all, the Chinese financial market is fundamentally different from the U.S. market. To qualify for a residential loan in China, consumers are required to put down a large down payment which is 50 percent for the first time home buyers. Therefore, Chinese buyers do not exhibit the reckless behaviour that was rampant in the United States prior to the financial crisis, like the subprime mortgages, which loans are given to everyone, no down payments are required and no documents at all. Governments quick policy responses From the article, it states that Hong Kong Monetary Authority (HKMA) introduced several containment measures...cutting mortgage limit...raising down-payment needed. HKMA introduced these measures right after a week of the breaking sale of the worlds most expensive apartment. Not just that, in 2 years (2009 2011), Hong Kong is now having their fourth tightening move. No doubt, this signals the ongoing concern over surging prices. However, there are some implementations carried out regarding this subject of matter. Like, the HKMA has ordered local banks to raise down-payments for non-local residents for better risk management. Mortgage loan borrowers whose income is primarily from outside Hong Kong will need to make a higher downpayment of at least 10 percentage points regardless of property types or values. For those who secure their mortgage loans not based on income streams, they will have to increase the down-payment to 60 percent. Buyers of homes costing more than HK$10 million will be required to increase up-front payments to 50 percent. Whereas for buyers of properties valued below HK$7 million can still make a down-payment of 30 percent with the loan capped at HK$4.2 million. There are really many restrictions on the down payment to limit the buyers from purchasing more real estate properties.

Besides, China also approved property tax trials on some homes in Shanghai and Chongqing, to curb real-estate speculation and asset bubbles. The Shanghai rate is temporarily fixed at 0.6 percent for all taxable residential properties. Without property taxes, the costs of holding empty homes are very low, which provides a great incentive to speculators in buying real estate for investment purposes. So, levying property tax on individual home buyers can guide them to make rational decisions. Similarly in Singapore, they release more land for development so as to curb supply-driven inflation. The same goes to China, because urbanization in China is growing too, even if speculative buying slows, demand for housing will remain high. According to the State Council, as many as 400 million people will move to cities by 2035. Singapore also disallows loans on homes under construction to prevent payment deferment. No doubt there are signals showing signs of Asia housing bubble but from the evidences abovementioned suggest that East Asian countries are always aware of that and have their methods to curb the soaring property prices and prevent the burst of housing bubble. It is very different from what the U.S housing bubble was back in 2008, which none measures were made to curb that situation. We also see the effort of East Asian countries doing their best to cool down the growing housing bubble market. So, with the East Asia governments quick policy responses and their financial market system, they are happily keeping the boom under wraps. Argument Property analysts were still adamant that the situation was no cause for alarm. This is incorrect because for example in HK, they already have 4 times of tightening moving, adjusting the down payment rations in 2 years in order to cool down the soaring price in the property market. HK even has the most expensive apartment in the world too. All these are the signals or alarms for the growing housing bubble. This is noticed by the East Asian countries therefore measures are implied buy different countries like Singapore, China and Hong Kong.

After seeing Asia to have a positive future look on property, Malaysia property trend is equally important to identify whether there is property bubble in Malaysia. Malaysia property trend Malaysia has long been a heaven for property purchaser, and so the Malaysia property has a chance to growth, an expert from the region said. It is due to a strong economic climate, new government policies, high living standard and a rich culture to encourage foreigner and local to make investment in our country. Current trend in purchasing Malaysia property has divided into two categories which are capital city of Kuala Lumpur or within the new coastal resort. Those experienced and qualified workforce from local and international prefer the capital city of Kuala Lumpur whereas the new coastal resort is build for the tourist spot. Other than that, investors are increasingly looking to buy an older building in a prime location, refurbish it and then sell it for a profit. From the paragraph above, we mentioned that one of the investment experts from the region has claimed that the Malaysian property market has the prospect for growth. Chief executive officer of MPGA Asia stated that, residential property of Malaysia is realistically priced when compared to other locations in the region. According to the recently released Knight Frank Global Property Index, the Malaysian residential market has seen values rise 6.4 per cent in a year, with prices registering growth of 1.4 per cent in the past six months. Therefore, with prices expected to rise in the coming years, property in Malaysia offers some excellent opportunities for foreign buyers and investors. Moreover, with the encouragement of new government policies, foreign investors and buyers are currently looking to Malaysias property as a lucrative property market. Besides, the Malaysian ringgit (RM) is very cheap compare with the sterling that makes investment in Malaysia property in a highly lucrative option. There are many economic and political reasons why Malaysia offers so much promise as a strong emerging market today. People always seeking for a safe and secure place to live, which is means that there is no one willing to putting themselves into a country with full of natural disasters or a country with a lot of polities corrupted,

Malaysia is one of the country with free of natural disasters and its located near the equator, hence its year-round tropical climate and its ideal for tourism. In addition, Malaysia boasts a stable economy and government. It already has a world class infrastructure, industry and support along with a modern and cosmopolitan lifestyle and English is widely spoken by community. In addition, through the research of the tourism of Malaysia, Tourist arrivals in Malaysia rose by more than 160% between 2005 and 2010, with the increment of tourist visit to Malaysia, economy of Malaysia will grow as well hence will be another reason to attract foreigner to do investment in Malaysia market. Figures provided by the National Property Information Centre (Napic) show that average prices for homes in Malaysia rose a whopping 19 per cent to RM273, 000 in the first half of this year, from RM220, 000 in the same period last year. For Kuala Lumpur, the increase has been even more dramatic, rising an eye-watering 35 per cent to more than RM700, 000 in the first half of the year, up from RM523, 000 last year. The market, however, may be starting to lose its appetite for properties due to the high prices.

Napics Property Overhang reports show that unsold properties in Malaysia rose to 22.6 per cent of new launches in the second quarter of this year, from 19.5 per cent in the fourth quarter of last year. For Kuala Lumpur, unsold properties rose to 16.1 per cent from 15.8 per cent, while for Selangor it rose to 14.6 per cent from 12.4 per cent. This should be taken aware of because property bubble forming due to increasing in

property price, but this also could be say as real blooming in housing industry. But unit unsold should be taken aware. The property bubble will formed when there is excessive lending and low borrowing cost. After the financial crisis at year 2008, there has been some concern in recent years over an imminent property bubble in Malaysia. At the moment, property in Malaysia has not facing property bubble like in some others countries such as Singapore, Hong Kong and China. However, there could be a property bubble in certain part of Malaysia because banks had been over lending to the sector. Prices of houses in some popular areas such as Klang Valley, Penang and Johor have appreciated by 10 per cent to 30 per cent over past six to eight months. This issue has been concern by central bank and mortgage loan limit might be impose to some critical sectors, such as the upper medium to high-end landed residential sector and non-owner occupied houses. If the loan limit is implemented, purchasers who own multiple properties may also be subject to it. After the observation and research gone through by the investors, property investors are that Malaysia property scene is similar to one of a bubble building up which are loose lending standards and innovation in the mortgages. The reasons are banks began to drop their once strict requirement to prospective borrowers. Initially borrowers need to put at least 20 percent for the down payment for the property, after that they dropped that to 10 percent and then goes to 5 percent. In short, anyone could borrow money to buy properties at that time including those with poor credit records and even students. Continues with the innovation in the mortgages, the interest rate was fixed and the borrower paid a fixed amount every month until the whole loan was paid off. With all these things going for it, it was little wonder that the property market exploded. Some of the mentioned about could be helped those less-privileged people to buy their own house. However, they would do not have enough funds to repay the loans and this will lead to an issue that may decrease a banks own capital hence bank will be short on capital. When bank start cutting back credit, it will affect the economy and affect the price of property as well. In conclusion, from all of these reasons and statement above, we can see that economy Malaysia is still stable and good. It is because properties in Malaysia have a chance to growth due to foreign investors came in to make investment for Malaysia

was a country with free of natural disasters, good government policies and Malaysia currently is not facing property bubble. In order to maintain a good economy, banks shall control the loans by only borrow not more than 80 percent of the amount to the borrowers. Furthermore, mortgages was a so called loan with a fixed amount, it shall not misused. Banks should only lending loan by checking the person, peoples with a good payment background and didnt owe banks for more than 40 per cent by his / her annual income instead of lending loan with blindly even those who have poor payment paid off. With keeping up this action, Malaysia only will survive as a country with no property bubble.

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