Property market crash: Rising prices vs salary increments

Briefly, the property bubble will burst when the market can no longer support property prices. The “support” we are talking about here refers to incomes people earn.

If their incomes are small but property prices are high, they will not be able to support these prices for long.

In brief, property prices shoot up when popular areas begin to crop-up, and buyers want to buy property in these areas.

In time, the main issue with these areas will be that of supply, meaning that these areas will be limited in supply.

However, the number of buyers with money who would like to buy in these limited supply neighbourhoods will always keep increasing.

Who are some of these buyers? Those who just got promoted into senior management, for example. Those who just switched jobs with a 30% increment.

Last but not least, those who may have got a windfall bonus of eight months (this is not uncommon in some industries) and suddenly have enough money for a decent downpayment.

These situations continue to happen but what about the supply of properties in particular hotspots?

Well, supply is nearly stagnant unless it’s areas near these hotspots instead. Thus when demand is more than supply, prices move up.

However, prices CANNOT keep moving up if it’s moving much faster than a person’s income is growing. The image below shows the average salary increment in Southeast Asia for 2018.

Let’s assume property prices went up by 10% in one particular year, and the typical salary increment for that year was 5%.

The market will still be okay at this point because although it’s tougher, buyers can still afford it.

Let’s say that in the second year the same thing happens, and buyers although upset, still decide to buy.

If the same thing happens in the third year as well, a potential buyer will really be stretching his monthly mortgage to the limit if he still wishes to buy property that has gone up by over 30% while his salary has barely touched half of the property price increase.

If this continues for two more years, it’s clear that the majority of buyers will no longer be able to afford the increase.

In other words, every time property prices rise way faster than a person’s income does, the bubble will continue to build up.

When the price can no longer be supported by the average buyer’s income, this is when the property market will crash.

There is no need for any predictions – simply find out what the property price increase was and what a buyer’s salary increment was. And you will have your answer.

Source: FMT