• Top Picks: Matrix Concepts and IOI Properties. In a rising interest rate environment, we prefer affordable landed township developers with ongoing matured developments, as well as asset owners. We believe higher interest rates will likely dampen the demand for property, but the extent of this will depend on the strength of economic growth. Sector valuations are cheap but, given the negative headwinds, re-rating catalysts seem remote. Maintain NEUTRAL on sector.

• High inflation accelerates “normalisation” in interest rates. Raising interest rates will likely be the main monetary policy tool for many central banks over the next 6-12 months, as global inflation worsens. Locally, there could be one more Overnight Policy Rate (OPR) hike in the remainder of 2022 after yesterday’s 25bps hike, and possibly two more increases in 2023. This should bring the OPR to around 2.75-3% by the end of next year, while mortgage rates may reach 4.1-4.15% by end-2023 from 3.1-3.15% currently.

• Expect transaction volume to fall in tandem with rate hikes. Based on historical data since 1991 (Figure 1), transaction volume typically falls when the average lending rate is revised up, and vice versa. Essentially, this means that transaction volume or housing demand will likely fall when Bank Negara Malaysia raises the OPR progressively over the next two years. The extent of the decline (in demand) would also depend on whether the economic growth trajectory remains intact. Any slip in GDP growth could worsen the drop in housing demand.

• The key is economic growth. Assuming the Malaysian economy continues to recover (RHB’s current GDP growth forecasts for 2022-2023 are 5.3% and 4.5%), we think the decline in demand for property may still be relatively moderate, as mortgage rates by end-2023 would still be comparatively lower than the 4.5-4.6% levels recorded five years ago. Also, home buyers should be able to adapt to the higher interest rate environment over time. However, as the risk of a recession emerging in the western countries is growing – although the potential downside risk to economic growth may delay the speed of interest rate hikes – demand for property will still be negatively affected, as unemployment rates may rise.

• Our cautious outlook is due to the fact that YTD impairment on residential mortgages is up 14% YoY. Home buyers tend to be more sensitive to rate hikes amidst an inflationary environment, as every 25bps hike in the OPR will lead to a 3.2-3.5% rise in monthly mortgage repayments.

• House prices growth to be flat. Growth prospects for this remain tepid, as the demand for property and market sentiment are typically sensitive to various economic factors. Nevertheless, the persistent supply glut has already capped the house price increase over the past four years, and the overhang issue will likely stay put longer as unstable economic growth will affect the speed in unwinding unsold units.

Source: RHB Securities Research - 7 Jul 2022