Will the Vaccine rescue a faltering Property Market?

Pent-up demand amid huge savings due to pandemic-induced uncertainty may be the driving force for a surge in demand for real estate post-MCO.

Dr. Foo Chee Hung The Principal Researcher of MKH Berhad

A series of lockdowns with varying restrictions to contain the spread of the COVID-19 like MCO, CMCO, EMCO, and RMCO, have caused Malaysia’s economy to shrink by 5.6% in 2020, being the biggest contraction since the 1998 Asian Financial Crisis (-7.4%). While the rollout of vaccine programs is expected to put an end to the current recession, it will still take time for the economy to recover to its pre-crisis level.
To recap, April and May 2020 saw a drastic drop of GDP by 28.7% and 19.6%, respectively, following the full-scale lockdown or Movement Control Order (MCO). As soon as the restrictions were loosened with the implementation of the Conditional Movement Control Order (CMCO), a more pronounced recovery was seen, with a smaller GDP contraction of -3.4% in June 2020.
Since then, the growth of GDP was hovering around -1.6% to -4.7% in the second half of 2020, which saw the Recovery Movement Control Order (RMCO) take effect (Fig 1).

However, the re-imposition of more stringent containment measures in January 2021 (MCO 2.0) due to the resurgence of COVID-19 outbreak across the country has, once again, obstructed the recovering economy activities. This is evidenced by studying the consumer sentiment index (CSI).
Both the CSI and GDP have suffered the biggest dip in 2Q2020, followed by a strong recovery in the subsequent 3rd and 4th quarters of 2020 (Fig 2). Due to the January 2021 implementation of MCO 2.0 that has affected many economic activities; coupled with the general negative perception among consumers and investors, CSI declined slightly from 91.5 in 4Q2020 to 85.2 in 1Q2021. Given that the GDP growth is likely to follow the trajectory of the index, the country’s economy will inevitably show a sign of contraction in 1Q2021.
Being a sector that is highly sensitive to consumer confidence and adverse events, the real estate market is expected to follow a similar trend. Although its downturn is not as severe as sub-sectors like F&B, accommodation, and transportation & storage (Fig 3), it is still impacted by the dramatic changes in consumer behavior arising from business shutdowns, travel restrictions, and social distancing, leading to the current weak market sentiment.

Fig 1: Performance of monthly real GDP growth during series of lockdowns in 2020

The vaccine rollout that promises a return to normality can definitely help to lift up the overall consumer sentiment and eventually delivers a boost to the real estate market.
Looking ahead, the real estate market is poised to return to the pre-crisis level as domestic activity gradually picks up. This is because once those in the hospitality, leisure, and entertainment industries are able to operate business as usual, or at least in a greater capacity than they currently can, people will be flocking back in, boosting both the rental and buyer markets. Once again, the appeal of property development and investment will return.
In fact, from the Google COVID-19 Community Mobility Trend – indicating the changing trends of visits to places such as restaurants, cafés, shopping centers, theme parks, museums, libraries and cinemas, as compared to the pre-lockdown level – one can see that economic activity resumed once mobility restrictions were eased (Fig 4). As of 7th March 2021, mobility trend has improved to -20% and is anticipated to increase further with the easing of movement restrictions.

Source: DOSM, MIER
Source: DOSM

Huge savings

The current COVID-19-induced recession is different from the previous recessions that we have faced. Past recessions were caused by internal weaknesses in the financial system, while the pandemic recession was caused by an external shock to an otherwise healthy economy. Since it is a direct result of implementing stringent containment measures that cause interruptions in normal activities such as business operations, consumption, and investment, the resumption in economic activities will stimulate higher consumer spending, leading to an improved buying sentiment in the real estate market.
COVID-19-induced uncertainty has also triggered a wave of saving among Malaysian households. According Bank Negara Malaysia’s (BNM) statistics, bank deposits in current account and savings account (CASA) surged 10.3% and 12.6% in March and April 2020 respectively.
Meanwhile, currency in circulation stood at RM466.2 billion in April 2020 compared to RM425.3 billion in the same month in 2019, reflecting a year-on-year growth rate of 9.6%. This was happening despite the low rates offered to customers. The uptrend in CASA deposit growth and steady rise in individual deposits suggest that households are prioritizing savings and shoring up on cash and liquid assets even more than before.

Fig 4: COVID-19 daily community mobility trend (% difference in visits) Malaysia

Similarly, homebuyers and investors held on to their money due to the uncertainty in the market. It is not that they are putting a complete stop to their investment plans, but to conserve more cash in the event of calamity in the economy.
As consumers are choosing to be conservative and are “playing safe” by increasing their savings, one can expect that this will contribute to a higher buying interest in real estate in the post-MCO era.
In fact, an increased buying interest for property can be indicated by studying the volume of mortgage applications during the past year. There was a steep drop in loan amount during the MCO period (Fig 5). But as soon as the containment measures are relaxed, there is a surge in loan applications. More tellingly, the loan amount is even higher than pre-MCO period.

Fig 5: Loan applied (RM) for the purchase of property (RM)

While MCO 2.0 implemented in January 2021 disrupted activities in the real estate market, its impact is expected to be lesser than MCO 1.0. This is due to the less stringent restrictions on business operations and activities during the second MCO. Coupled with the home ownership campaign (HOC), stamp duty exemptions, lifting of the 70% loan margin for third house ownership, and real property gains tax (RPGT) exemption for up to three houses for Malaysian citizens; the real estate market in the coming months is sure to react positively.

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