If you read the news around the world, there are people keep saying a housing bubble is imminent in their county. Although it has just happened, like in the United States when the last housing bubbles brought down a few investment banks which had been hit by the sub-prime scandals, people who are smart enough say a housing bubble is in the making there. China is another country people is expecting to have its property bubble burst anytime soon. Why does this keep happening again and again?
It is due to the nature of housing. People keep on buying houses to live in it and to try to make a lot of money out of it by selling it at a higher margin. The question is, why don't people learn that they will drag down the economy due to their greed to make a profit? Why do they keep on doing the same thing again and again? Aren't the governments around the world doing anything about it?
Here's the thing about housing. There are genuine buyers who want to have a roof above their head and there are those who think houses as an investment. They are mixed together without any borders separating them in the same space. When you see a long line queuing up at a property launch, you cannot determine who are the genuine buyer and who are the speculators. The speculators who buy and want to make money out of the property want the same treatment the genuine house buyers are getting. It will make the profit higher as the housing developers will throw in so many things into the sale. Including cheaper housing loans.
Governments around the world have been trying to control speculative buying of property by imposing tax on the profit anyone makes when a property is sold. In Malaysia it is known as Real Property Gain Tax. The current tax regime impose tax on property sold within 5 years of the property being bought. The tax imposed is a withholding tax where the seller will have to pay the Internal Revenue Department and only get it back once it is checked out there was no profit made on the property transaction. The withholding tax for Malaysian property sellers is 2%.
Does this current withholding tax stop or reduce the property transactions or sales of houses? Does it stop the speculative buying of houses? No. It does not.
Here's why.
Any good property speculator will know you only have to factor in the cost of the Real Property Gain Tax into the margin that you will make from the sale of the property. This Real Property Gain Tax is not the only thing the property speculator has to contend with. The Malaysian government has imposed in 2010 a maximum margin of 70% on any third housing loan taken by any one buyer. That is already a deterrent factor there. Still people buys houses speculatively and try to make huge profits out of it.
Banks are also culprits in the making of housing bubbles. Why? Because they make so much money out of giving out housing loans to people who want to buy houses, whether they need it or not. A speculators adage has always been "If you can use other people money, do not use your own money." This has also been the adage that fueled a few of economic crisis in the world.
Another factor why housing bubble will visit the world every few years in this modern era is due to the property gurus that keep teaching people to buy and sell property to make a profit out of it. While these property gurus go running and laughing to the bank thanking the gullible students for paying them an arm and a leg trying to learn how to make money from property speculation, new property speculators are born and play the property speculation game all over again
So, as the sun keeps on shining and people keeps on needing a house, a housing bubble will keeps on visiting each property hot spot.
Again and again...
*Originally wrote this as a LinkedIn post : https://www.linkedin.com/today/post/article/20140617041553-25491383-why-a-housing-bubble-will-always-happens-again-and-again-all-over-the-world?trk=prof-post
