Boom & Bust Cycle: What Causes It?

In the “Business and Real Estate Cycle: The Kuala Lumpur Office Market” by Siti Almafahaza, Stockholm, 2011 master thesis, the author described the development of Real Estate in Kuala Lumpur that has taken place since 1960’s and how it has changed into a modern city with the impact of industrialization of the economy. The study shows that real estate cycle and business cycle do move in recurring wave-like fluctuations that are in a circular motion.

Below are extract from the thesis that shows the factors that cause the wave-like fluctuations and cyclical movements:

“The price of land is comparatively low compared to other neighbouring Asian cities. As a result, this has creates strong demand for real estate in Kuala Lumpur and areas close to the city. A great number of new developments have grown along the city lines and greater Kuala Lumpur areas. The greater areas then have been sprawled into nuclear cities around Kuala Lumpur which is known as Klang Valley. The demand of real estate in these areas is increasing consistently every year that has accumulated to short supply of real estate and thus increases the price.

Meanwhile, the robustness of economic is not just bringing different dimension to real estate market but also to the financial market. Despite continuous demand on real estate, financial market has become more liberalised and exposed to the risk of financial crisis. The periodic crisis is often followed by real estate price bubble. As cited in Allen and Gale (1999), historically the financial crisis that has happened in large cities was formed by the liberalisation of their financial market. In addition, the liberalisation of financial market has increased the lending rate thus increase the price of real estate. These further contributed to price collapse and initiated real estate bubble.

Furthermore, in evidence to Renaud (2003), the main cause of the Asian financial crisis in 1997 was evidence of weakness of the financial institution. Banking liberalisation opens more potential in term of foreign direct investment and greater capital inflow, but the banking liberalisation has also resulted in some negative impacts. The bank lending is much more relaxed and low interest rate. Furthermore, this capital regime that has caused much to the non-performing loan. This has backfired on the financial institution at that time and caused the financial turmoil. In order to overcome the problems, the central bank has raised the interest rates which later exposed more problems to the real estate industry.

Identical to other large cities, Kuala Lumpur has also experienced boom bust period of real estate in late 1990s. The bust period of real estate cycle in Kuala Lumpur has strong connection to Asia financial crisis in 1997. Prior to the crisis, Kuala Lumpur has rapidly developed into urban area as part of its urbanization process with record high demand of real estate. The financial liberalisation has increased lending rates thus increased the real estate price. At the time when Malaysia been hit by the Asian financial crisis 1997, the real estate bubble in Kuala Lumpur has finally burst. The real estate was adversely impacted by the crisis and took a long time to recover.

Moreover_, the financial crisis and liberalisation of financial market_ are not the only causes of real estate bubble at that moment but other factors such as speculation have also contributed to bubble in Kuala Lumpur. The ability to acquire multiple real estates and with a less strict regulation increased the price of real estate in Kuala Lumpur. This led to oversupply and lowered the occupancy rate. Besides, the scarcity of lands in city centre and increase cost of raw materials also caused the burst of real estate bubble in Kuala Lumpur.”

In summary, the said study indicates, the following factors contributed to the boom and bust in real estate cycle in Kuala Lumpur.

• The demand for real estate
• Liberalization of financial markets
• Easy lending and low interest rates
• Speculation through purchased of multiple properties in anticipation of increasing property prices
• Scarcity of land
• Increase cost of raw materials
• Government interventions

Many such research and articles on the boom and bust cycle are prevalent. However none has been able to show the timing of when the boom and bust will occur and the real factor for the increase in house prices in Kuala Lumpur or Malaysia as a whole.

In Property Millionaires’ Secret Clock book that will be launch next week you will know the main reason why boom and bust will continue and it will show you the Time in Malaysia. By knowing the time you can now plan out your investment strategies accordingly based on the property cycle.