A Guide to Property Purchase – 12 Factors Affecting Property Value

Have you ever wondered what facts or circumstances pertaining to a property influence its value and price? When buying a property for own use, how do you evaluate a property and know the reasons that make it a good choice? And for a property investor, what factors contribute to capital appreciation and an increase in rental income of an investment property?

As a buyer, knowing the positive factors enables you to make a prudent purchase decision. While identifying the negative factors empowers you to put them on the table as “bargaining chips” to negotiate for a better deal.

Likewise, property sellers may use the positive factors of their property to more effectively market, sell and obtain a better price and terms.

The following explanations can help you better understand the 12 factors affecting property value:

1. General Economy

When considering the general economy, we are actually examining the following economic indicators that may influence the property market:

1. Gross Domestic Product (GDP) – the market value of all final goods and services produced within a country in a given year. The higher the GDP, the more buoyant the economy is likely to be.
2. Foreign Direct Investment (FDI) – refers to the total investment made by foreign companies into companies based in our country. The more FDI comes into our country, the more fund is available to develop the economy and create wealth.
3. Employment Rate – the employment-to-population ratio. This ratio is used to evaluate the ability of the economy to create jobs, which in general will have positive effects on the economy.
4. Business Confidence – an economic indicator that measures the amount of optimism or pessimism that business managers feel about the prospects of their companies. It provides an overview of the state of the economy.
5. Inflation Rate -a rise in the general level of prices of goods and services in the economy over a year. Inflation reflects an erosion in the purchasing power of money.
6. Consumer Sentiment – an important economic indicator that gauges consumers’ buying intentions and level of optimism or pessimism going forward.

2. Demographics

Demographics is the study of socioeconomic characteristics of a population expressed statistically, such as age, sex, education level, income level, marital status, occupation, religion, ethnicity, birth rate, death rate, the average size of a family, the average age at marriage.

The following demographic factors often affect the property value of a certain area:

1. Size of population and its growth (rural-to-urban migration) – causing property demand to exceed supply thereby pushing prices up.
2. Age and distribution of population – working adults aged between 25 and 45 years are more likely to buy homes.
3. Income level and income growth of population – the average income level and income growth of people in a particular area determine the purchasing power of the people in that area.
4. Consumer behaviour of the population – for example, young professionals in Damansara or Mont Kiara areas are more inclined to go for the stylish and fashionable condominiums or fabulous lifestyle concept homes.

3. Demand and Supply Situation

In the property market, supply is inelastic to demand – meaning that developers are not able to build quickly enough due to lengthy planning and approval processes while demand is rising. On the other hand, when the properties are ready in 2 or 3 years time, demand may have cooled causing an over-supplied situation. Due to the inability of supply to catch up with demand, and vice-versa, property prices can be volatile.

4. Location and Accessibility

The famous adage that “property is all about location, location and location” has certain time-tested truth. However, it is not the whole truth as other factors described in this article also affect property value. By location and accessibility we mean:

1. Easy access to highways/infrastructure – centralized locations in urban areas with a criss-cross of highways such as the LDP, Kesas or NKVE are higher in demand and higher in value. There must be easy access into the highways.
2. Light Rail Transit (LRT) and Mass Rapid Transit (MRT) – within 20 minutes’ walking distance to LRT/MRT stations is convenient, but not too near to them to avoid parking congestion, noise and possibly more petty crime.
3. Conventional Public transportation such as bus stops – is important in areas without LRT/MRT stations, or to get to the LRT/MRT stations.

5. Facilities and Amenities

The presence or absence of these desirable or useful facilities and amenities often influences property prices of a certain area:

1. Schools, colleges and universities – excellent learning institutions are magnets to home-hunting parents. For instance, Mont Kiara’s international school makes it a sought-after place by expatriates.
2. Shopping centres and hypermarkets – for convenience in buying all kinds of necessities, and because shopping is a favourite pass-time of Malaysians!
3. Variety and quality of businesses – a large cluster of shops catering to a wide variety of needs and tastes makes a place attractive. Variety creates complementarity effect – as a one-stop place for most shopping needs.

6. Quality of Environment

Homebuyers these days highly value appealing environment. It is always wiser to rather buy the worst property in the best area than to buy the best property in the worst area. This is because one can renovate the house, but is unable to single-handedly change the environment.  The quality of an environment refers to:

1. Serene, clean and green environment – this improves the quality of life and add value to the properties.
2. Developments or buildings in the neighbourhood – new developments/buildings in a neighbourhood improve the appeal of the location, whereas the presence of old/obsolete ones has the opposite effect.
3. Crime rate – safety is a basic need that ranks high in the desirability of a location, especially in an affluent neighbourhood.
4. Traffic condition – affects people’s stress level and health, thereby affecting the property value in an area.

7. Property Features

Property features refer to the distinctive attributes or aspects of the property that offer certain advantages or benefits. They are:

1. Branding/reputation of developer – affects consumer’s confidence in the developer’s ability to deliver quality, especially in sell-then-build schemes. In the economic recession, properties built by reputable developers tend to hold up their value better.
2. Lifestyle concepts – such as Setia Eco-Park and Desa Park City appeal to the usually affluent and discerning buyers who value a certain concept of lifestyle.
3. Gated and guarded – this has become a basic necessity of late due to soaring crime rates.
4. Standard and quality of building management – the building management can make or break the quality of maintenance and housekeeping of the premises, affecting the property’s reputation and value.
5. Property orientation – properties facing directions such as hot evening sun, road junctions, high-tension cables or cemetery are undesirable and are generally lower in value.
6. Views and level -properties facing magnificent views especially from higher levels, or facing iconic landmark such as KLCC Twin Towers – command higher prices, old or new.
7. Special features – such as infinity swimming pool, allocation of multiple car parks or free feeder bus service to LRT/MRT stations make some properties appealing.
8. Quality/taste of renovation/finishing/landscaping – this factor is especially important to renovated resale homes due to wide-ranging tastes of individual owners – some are enchanting or fabulous and others off-putting.

8. Money Supply and Cost of Borrowing

Most property purchases are done through mortgages. The supply and cost of borrowing money therefore, play a pivotal role in the demand for properties at any time.

1. Money supply – is the total stock of money in the economy, currency held by the public plus money in accounts in banks. The more money available in the economy and the banks, the more money is available for lending to property purchasers.
2. Ease of obtaining loan – Bank Negara’s lending guidelines for banks can affect purchaser’s eligibility in obtaining loans and the number of loans. Recent examples are the 70% cap (maximum margin) on third housing loan, and eligibility based on the borrower’s nett income instead of gross income. These measures have a cooling effect on the property market.
3. Interest rate – the Base Lending Rate (BLR) fixed by Bank Negara, which is the reference interest rate used by all banks in lending out money, also changes the cost of borrowing for property purchase. A reduction in BLR encourages purchase, whereas an increase in BLR dampens the desire to purchase.

9. Cost of Building Materials and Labour

Cost of building materials such as cement and steel, or import duties on marble and tiles, directly impact the cost of a building. Increase of labour cost – often due to shortage of labour supply, higher wages or permit’s cost – also increases the cost of construction. This factor forces developers to raise prices on new projects, which in turn drives up prices of resale properties.

10. Number of Investors and Speculators in Market

The number of investors and speculators in the property market changes over time due to the perceived opportunities or threats present in the market, arising often from changes in government’s policies in regulating banks’ lending or property taxes. More investors and speculators in property market drive up prices, while less of them has the opposite effect.

11. Legal and Planning Control

The State governments have vast powers over land matters. They are able to influence the prices of land, and hence the prices of property, through legal and planning control.

1. Availability of land – strategic vacant land in urban areas are diminishing, especially in the Klang Valley. Land prices are rising due to scarcity of land coupled with increasing population and housing needs. The state governments are able to alienate new lands for developments to the private sectors.
2. Zoning and rezoning of land use – for example, when Section 13 of Petaling Jaya was rezoned from industrial use to building/commercial use, land value in this location spiked.
3. Regeneration of area – an example is YTL’s renewal projects in Sentul which rejuvenated the whole area that was previously unappealing.
4. Property taxes – when Real Property Gain Tax (RPGT) is raised or lowered, property investors and speculators respond by opting to enter or exit the market, often en masse, thereby affecting property prices.
5. Freehold or leasehold – Freehold land status is an all-time favourite among buyers due to perpetual ownership and ease of transaction process. Leasehold properties are generally not popular due to restricted tenure, more legal requirements for transfer, and lesser margin of bank loans as leasehold tenure decreases.

12. Emerging Trends

There is now a global phenomenon known as the rise of mega-cities in the developing world, which shifts population from rural areas to urban centres. This occurs as more and more people are attracted to cities for job opportunities and metropolitan splendour and allurement.

There are economic advantages when people congregate and businesses agglomerate, making the urban society an efficient production and consumption centre of goods and services. When more people are squeezed into limited city land, competition for living and business spaces drives up property prices there.

Conclusion

Historically, property prices are always on the rise. In fact, property prices almost always double every 10 years. Inflation and population increase especially play a big role in this phenomena, both in Malaysia and globally.

Any time is the right time to purchase a property if you know what you are getting into. With the long-term steady rise of property prices, the market forgives the purchaser who slightly overpays, but punishes the buyer who hesitates and misses the opportunity.

Armed with the above understanding of the 12 factors affecting property value, you will be able to navigate through the challenges of selecting and negotiating in property purchase with more confidence and finesse.

Contributed by: Aaron Lee

For further details please email aaronlee@hartamas.com