Assignment Task

 

The Ahmad family – comprising of Mr. Ahmad, aged 30, and Mrs. Ahmad, aged 28, and their two young children – relocated to Kuala Lumpur, Malaysia in 2010 when Mr. Ahmad received a job offer from a leading advertising giant. For the next six years, they rented a three-bedroom condominium for RM5,500 per month, which included parking and condominium fees but not the maintenance cost, which was borne by the owner of the condominium.
While renting had made life easier, the Ahmad family had begun to weigh the pros and cons of purchasing a larger unit, in the same building which had become available in June 2016. In the past three years, the real estate market has softened somewhat and the cost of the unit had declined from RM1.6 million to RM1.5 million. The idea of homeownership as a form of pension investment appealed to the couple. The month rents could be used for mortgage payments instead.

HOME OWNERSHIP AS A FORM OF INVESTMENT
Some years back, the Ahmads had made a decision to settle down in Kuala Lumpur. They understood that Malaysia had a pay-as-you-go pension system that placed the
responsibility of retirement planning on the individual citizen instead of the government. All citizens were required to put a percentage of their monthly income into their own account in the Employees’ Provident Fund (EPF), which is managed by the Employees’ Provident Fund, a statutory body under the purview of the Ministry of Finance which manages the compulsory savings and retirement planning for private sector workers in Malaysia.

MALAYSIAN PROPERTY MARKET
Between 2009 and 2013, property prices rallied 70 per cent. Exhibit 2 shows the residential price index reached a level of 170 in the third quarter (Q3) of 2013 while it was
at a level of 100 in Q1/2009. During the same period, the average nominal wages increased by only 30 per cent.
Since 2013, the Malaysian property market had softened on the back of sluggish economic growth, various newly adopted property cooling measures (see Exhibit 3), and
a large supply of newly built private residential units. According to Y Bhg Dato' Ir Soam Heng Choon, president of the Real Estate & Housing Developers' Association (REHDA)
Malaysia, there were 57,588 new private residential units and 13,101 executive condominiums available as of May 2016. These numbers were significant in view of the
prevailing weak demand. Exhibit 4 shows that the supply of new units in the pipeline had dropped from Q1 to Q2 in 2016.

Specific questions to be answered
1. What is the required monthly mortgage payment?

2. What are the initial cash outflows of the buy decision?


3. What is the present value of all cash outflows of the buy decision from Month 0 to Month 120 (10 years)?


4. Compare the relevant monthly cash outflows of the buy decision and rent decision from Month 0 to Month 3, assuming rent stays constant? What are the additional payments required to buy versus rent?


5. What is the principal outstanding on the mortgage at the end of 10 years?

 

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  • Uploaded By : Brett
  • Posted on : May 20th, 2019

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