The growth of residential properties and housing loans

Properties cannot grow without its twin brother's help - the banks. Over the years, we have witnessed the growth of the residential property sector, both in terms of prices as well as total houses sold. I have not been comfortable with the property sector for quite a while, especially since 2010. There are very little being talked about the danger of the loan exposure to the property sector as well as the financial sector - mainly banks because the lesser we talk about this, it is hoped that nothing will happen.

I could not see or project for sure how the sector will pan out in the near of medium future, but as I said I have not been comfortable. Let me show some numbers as below.

The above chart shows the loans to personal consumption market. I have taken out the commercial sector loan. The total loan is the total for all purposes - inclusive of housing, credit cards, commercial purposed, cars etc. As it is based on above, the Compounded Average Growth Rate (CAGR) of Total Loans between 1997 and 2012, is already very high at 9.03% (above average GDP) but the CAGR for loans to the residential property sector grew even faster - at a whopping 15.34%.

Another clearer table is shown below. The percentage of residential property loan to total loan size grew from 11.07% in 1997 to 27.24% in 2012. (highlighted in yellow)

On the other hand, the loans for purchases of securities to total loans dropped from 11.85% in 1997 to 4.54% in 2012. As at 2012, loans to residential consists of more than a quarter of the total loans. Is it worrying enough?

To soothe the worry, % residential loans to total loans exceeded 20% since 2001. Total loans however has started to register double digit growth since 2004 (except for 2007 and 2009). The question now is whether keeping residential loans to total loans of 25% to 30% is a new normal.

We have heard of the sector being still bullish-ly projected by research houses still in the future. Frankly, I am not too sure but we know the housing sector is much too dependent on financial sector. And I am sure that the loans growth cannot continue to grow more than 10% all the time. Sometime, it has to slow down.

We see what happened to the US housing market and the collapse of it. The aftermath, what happened to the banking sector - i.e. to Bank of America, Citigroup and many others. The Malaysian housing loan profile is a lot different to the US crisis, as the collapse were quickly done by subprime in US while in Malaysia, that part is not a thing to worry about. But still these numbers does not seem good.