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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB) An Online International Monthly Journal (ISSN: 2306 367X)

Volume:1 No.5 May 2013

414

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Factors Affecting the Price of Housing in Malaysia

Tze San Ong

Department of Accounting and Finance,

Faculty of Economics and Management,

University Putra Malaysia,

Selangor, Malaysia.

E-mails: [email protected]

______________________________________________________________________________

Abstract

The main purpose of this study is to measure the relationship between macroeconomic variables

and the housing price. This paper examines empirically whether the increasing trend in the

Malaysian housing price is related to changes in the gross domestic product (GDP), population,

inflations rate, costs of construction, interest rate and real property gains tax (RPGT). The paper

is exploratory in nature. The empirical data were collected from Valuation and Property Services

Department of the Ministry of Finance Malaysia from 2001 to 2010. The paper provides empirical

results that the gross domestic product (GDP), population and RPGT are the key determinants of

housing prices. However, changes in housing prices may not necessarily be influenced by the gross

domestic products (GDP), population and RPGT in Malaysia. The general finding of this paper

strongly suggests that housing bubbles in the Malaysian residential property market are becoming

bigger and stronger. The paper is useful for speculators, investors and buyers to know which

factors to account for in housing investment decision. This paper can serve as a guide for the

government in stabilizing the residential housing price in Malaysia.

______________________________________________________________________________

Keywords: housing price, economic variable, GDP, population, inflation rate, cost of construction,

interest rate, real property gains tax, Malaysia

JEL Codes: R2, E2, E5, E6

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mailto:[email protected]



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1. Introduction

Malaysia as a developing country has obtained benefits from the development of the housing

industry (Jarad, 2010). The Malaysian housing development has continued to fight in spite of

various constructions and restrictions (Agus, 1997). The housing industry has been using

conventional development methods for many years, because of the increasing demand for better

dwellings, the continuous changes in technology, the increase in the construction cost and the

tightness of the environmental policies and the concept of innovation, creation and state-of-the-art

design, all of which have begun to find their place in the industry (Yusof and Abidin, 2007).

The Government of Malaysia recognizes that housing is a basic need for every citizen. It is also

an important component of the urban economy. These have led to the method of policies and

programmers aimed at ensuring that all Malaysians have the chance to obtain an appropriate place

to stay and other related activities. Housing developments in Malaysia are carried out by both

parties, the public sector and the private sector, in terms of low-, medium- and high-cost houses.

The Malaysian Government has also established a housing policy that focuses on the involvement

of the private sector in housing production and delivery, especially in housing scheme development

(Asiah, 1999).

In recent years, rapid economic development has resulted in an increasing demand for

residential housing among urban areas in Malaysia. Reviewing the housing prices in Malaysia, the

prices have appreciated dramatically whether in major cities or smaller towns and depending on

specific location. Over the past ten years, the residential property market in Malaysia has

experienced a significant price expansion throughout Malaysia, involving higher rates (Table 1).

Most people are wondering such a high annual increases in house prices is totally out of sync with

annual income increases in the general population. In fact, most of the people are afraid that they

are unable to cope with such a high property prices. So far, even with the housing prices almost

hitting the sky, yet the real factors behind the illogical rise are still open to question. Successive

governments and policy analysts have identified the lack of adequate and affordable housing as one

of the critical problems facing the country. House and land prices are spiraling and even middle

class Malaysian are facing difficulties to own a home. Based on the economic theory, house price

movements are inherent in the regional demographics and regional economics, such as population,

GDP, housing finance, inflation rate, RPGT and cost of construction.

According to the Valuation and Property Services Department (JPPH), the average of all houses’

pricing has continued to increase from year to year from 2000 to 2010. There was an increase of

45% between 2001 and 2010.




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As stated in the Seventh Malaysia Plan, Malaysia intended to construct about 800,000 units of

housing for the population. In fact, 585,000 units, constituting 73.1 per cent, were planned to be

low- and medium-cost houses. Nevertheless, the achievements are somewhat disappointing, with

only 20 per cent completed houses reported in spite of numerous incentives and promotions to

encourage housing developers to invest in such housing categories (Ismail, 2001).

Moreover, as stated in the Eighth Malaysia Plan, Malaysia will continue to develop affordable

and sustainable houses for those with a low and medium income. However, Malaysia is facing a

difficult task in accomplishing the target of 600,000–800,000 houses during this period because the

conventional building system currently being practised by the construction industry is unable to

cope with the huge demand. Therefore, the former system must be replaced by an Industrialized

Building System (IBS) that will bring advantages in terms of productivity, indoor quality, durability

and cost (Incredible Expanding Mindfuck, 2001).

According to Angie (2009), CIMB research shows that the 5% RPGT “was a shock to us as the

Government had suspended RPGT for two and half years from 2007 to give the housing sector a

boost and attract foreign purchasers”. The Government encourages citizens to buy or sell houses in

the market. Because of that, those who have a higher income or speculators are buying a lot of

houses and reselling them. Therefore, the housing prices are increasing year by year. However, the

Government reimposed the RPGT on 1 January 2010. Any gain from selling a house within 5 years

will be taxed at 5%, so speculators are not encouraged to resell their property within 5 years.

However, the result of this strategy is not clear regarding whether it will help influence the housing

price to fall. The Government is implementing a number of activities to control the fluctuation of

the housing price; however, the effectiveness of those activities implemented by the Government

is still open to question. In addition, the housing price can still be influenced by macroeconomic

factors, such as the GDP, interest rate, cost of construction, population and inflation rate. These

factors can help relevant parties to handle the situation and stabilize the housing prices before the

condition become worse. The current situation of the housing environment is reflecting the

economic distortion; it is actually not what we call an economic take-off by the real economic

growth. Therefore, the property market could result in chaos if it is continuously growing like this.

As a result, this study aims to investigate the factors influencing the housing price in Malaysia.

The objectives of the present study are:

--To identify the causes of fluctuation in the housing price from 2001 to 2010;

--To investigate the economic variables that affect the housing price in Malaysia.




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2. Housing Price Determinants

The research conducted by Tse (1999) states that the fluctuation in the housing price has

significant impacts on the economic conditions of the population and society. Moreover, the

demand for housing is increasing in the market. So, the housing price is expected to rise due to the

imbalance between buyers and sellers. Therefore, when there are more buyers than sellers, the

housing price will increase. This can cause a self-fulfilling speculative price bubble (Levin and

Wright, 1997).

2.1 Population

Nowadays, as the population in Malaysia is continuing to increase, people need more houses to

live in but the production of housing is slow due to the many laws, regulations and procedures

related to the building of houses. The finding by Vermeulen and Van Ommeran (2006) states that

“people will move to another area where houses are built, but houses are not necessarily built in

the area where people would want to live”. This might be because of job transfers. Normally, people

will buy a house in a particular area because they work there or the rental fees are equal to their

housing payment per month.

In Malaysia, lack of affordable options to own property forces many Malaysians into the rental

market and informal settlements, which is drastically increasing due to population growth and

urbanization. In the real economy, perhaps there are a lot more factors that affect housing

prices but we cannot deny the facts that one of the significant factors might be growing

population.

2.2 Gross Domestic Product

The gross domestic product (GDP) is one of the most popular indicators in macroeconomics

used by researchers to represent economic conditions (Maclennan and Pryce, 1996). The GDP is

considered a popular indicator because of the relationship between the macroeconomic activity and

the housing price (Wheeler and Chowdhury, 1993). The gross domestic product (GDP) is the total

market value overall for all final goods and services produced in a country in a particular year. The

formula for the GDP is equal to the total consumer, investment and government spending, plus the

value of exports minus the value of imports. Base on Hii, Latif and Nasir (1999), fluctuations in

the GDP are significantly related to the number of terraced, semi-detached and long houses

constructed in Sarawak. According to them, terraces increase when the GDP is growing. Detached

housing is found not to have any significant lead relation. That means buyers are not influenced by

the GDP when making their buying decision. Conversely, the demand for houses generates housing

industry investment and helps the recovery of the GDP growth rate (Qing, 2010). This result is




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understandable, because housing investment is part of the GDP. An increase in a part will increase

the whole.

2.3 Labour Force

Little research exists on the impact of housing assistance on the labour supply. Two studies

(Reingold, 1997; Ong, 1998) examine the impact that the receipt of housing assistance for Aid to

Families with Dependent Children (AFDC) recipients has on the tendency of households to work.

If a large amount of the labour force is involved in construction, the cost of housing will increase.

Besides, construction involving a lot of professional workers with a high level of education, such

as engineering, compared with workers who are less educated, will cause the housing price to

increase because the cost of building a unit increases. The constructors, without doubt, will charge

the cost to the buyers. Therefore, the buyers are forced to buy at a higher price. Building activity is

stimulated by higher employment growth (Smith and Tesarek, 1991; Sternlieb and Hughes, 1997).

According to Hartzel (1993) , there are some disagreements regarding certain regional employment

characteristics that play a significant role in investors’ decisions.

2.4 Interest Rate

Bank lending may affect the housing price through various liquidity effects. The housing price

is just like the price of any asset. It can be determined by the discounted expected future stream of

cash flows. If the financial banks increase the availability of credit, it means that the bank will

provide lower lending rates and encourage current and future economic activity.

Basically, the better availability of credit will cause the demand for housing to increase when

the households are borrowing constrained (Barakova, 2003). The growth in demand will then be

reflected in higher housing prices. The relationship between housing prices and household

borrowing is two-sided. That is, housing prices may significantly influence household borrowing

through various wealth effects. When the housing finance interest rate is low, citizens will be

enabled to make some investments, such as buying more houses. The credit cycles have matched

the housing price cycles in a number of countries (see e.g. International Monetary Fund, 2000;

Bank for International Settlements, 2001).

According to Goodhart and Hofmann (2007), mutually reinforcing boom–bust cycles in housing

and credit markets may occur, which enhance the probability of a future financial crisis. However,

the two researchers cited suggest that the standards of both house prices and credit from their long-

run trends are useful indicators for future investors. Moreover, Goodhart and Hofmann (2007)

mention three different ways to influence households’ credit demand through housing wealth.

Firstly, households may be facing borrowing constrictions due to the financial market




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imperfections. As a result, if the instructors can offer more securities in the house, households will

wish to borrow more; in other words, the households borrow basically according to the capacity of

their securities’ net worth. Since the securities value of housing is quite high, an increase in housing

wealth opens up the borrowing constraints faced by households. Second, households’ recognized

lifetime assets may have a significant influence as a result of changes in housing wealth. An

increase in the recognized lifetime assets induces households to spend more today, which will mean

smooth consumption over the overall life cycle. Therefore, it will increase the demand for credit.

Lastly, the value of bank capital will also have an impact on housing price movements on credit

supply. That is, housing estimation increases the value of the dwellings owned by the bank. Besides

that, the values of loans are secured by housing loans. Therefore, a fluctuation in the housing price

will affect the risk-taking capacity of banks. So, banks are willing to lend more to the public.

In the nutshell, for homeowners, focus on changing interest rates because they have a direct

influence on real estate prices. However, interest rates also affect the availability of capital and the

demand for investment. These capital flows influence the supply and demand for property and, as

a result, they affect property prices.

2.5 Inflation Rate

Zhu (2004) showed the strong and long-lasting link between inflation and housing price. During

inflation, most things in the economy will increase their price. However, the cost of the raw material

for building a house will increase. According to Kearl (1979), an increase in inflation front loads

real payments on a long-term fixed-rate mortgage, and thus reduces the quantity of housing. It

must be noted due to the global scenario that increasing money supply causes inflation and house

prices to increase.

2.6 Real Preperty Gains Tax

The effect of the real property gains tax (RPGT) on housing satisfaction is also taken into

consideration. The RPGT was suspended in 2007, but the Government’s reimposition of the RPGT

in the 2010 budget has caught some by surprise. According to Phun (2010), the RPGT effective

from 1 January 2010 means that any gain arising from property disposal within 5 years will be

subject to the payment of 5% tax. According to a previous study, Tan (2011) states that the impact

of the reimposition of 5% real property gains tax (RPGT) on housing satisfaction is not significant.

Therefore, buyers will not take into consideration the 5% RPGT when they want to sell their

property within 5 years. It is logical to believe that the 5% RPGT will contribute to lower housing

satisfaction among Malaysian homeowners.




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Hypotheses developed:

H1: The population in Malaysia has a significant impact on the housing price.

H2: The gross domestic product (GDP) has a significant impact on the housing price in Malaysia.

H3: The interest rate has a significant impact on the housing price in Malaysia.

H4: The labour force has a significant impact on the housing price in Malaysia.

H5: Inflation has a significant impact on the housing price in Malaysia.

H6: The RPGT has a significant impact on the housing price in Malaysia.

Secondary data were obtained from Bursa Malaysia, the Department of Statistics of Malaysia

and Datastream. The study sample was identified from a database provided by the Valuation and

Property Services Department (JPPH) of the Ministry of Finance Malaysia. This department was

established on 1 June 1957. Currently, it has 2,101 members of staff, of whom 260 are professional

valuers. The responsibility of the Department has expanded to cover areas of expertise relevant to

and related to the real estate industry. The JPPH plays an important role in providing reliable, timely

and professional services in the development of the country as an advisor to the Government

relating to property and as a consultant to the Government in providing a property consultant

service, as well as assisting the Ministry of Finance in the implementation of policies related to

property, collecting, publishing and disseminating property information, providing training related

to property valuation and carrying out research and development in the field of real estate.

3. Research Variables and Operationalization

This research aims to determine the relationship that exists between macroeconomic variables

(GDP, interest rate, inflation, labour force, RPGT and population) and housing prices. The GDP is

the total value of goods and services produced within a given period (normally a year) after

deducting the cost of goods and services involved in the process of production. Before that, we

have to deduct allowances for the consumption of fixed capital as well. The GDP can be considered

as valued according to purchasers’ clues.

However, the interest rate is a rate that is an additional charge stemming from borrowing. An

interest rate is often expressed as an annual percentage of the principal. The construction cost is

expense incurred by a contractor for labour, raw material, equipment, financing from a bank and

the services involved in building the house. The labour force is the total number of the people who

are employed or seeking a job in Malaysia. The population means the whole number of people in

a country. Before performing regression analysis, tolerance and variation inflation factor (VIF)

tests, none of these tests detected multi-collinearity among the variables (VIF < 10, 16). Thus, it

shows no major problem for regression analysis.




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The regression model can be built as below:

Y = GDP + POP + INT + INF + COC + RPGT + E

where Y = Housing Price

GDP = Gross Domestic Product

POP = Population

INT = Interest Rate

INF = Inflation

COC = Cost of Construction

RPGT = Real Property Gains Tax

E = Error

4. Result and Discussion

Graph 1 indicates the housing prices in Malaysia from 2001 to 2010. On average, the housing

price was around RM139,099 during the year 2000, and increased by around 41 per cent by the

year 2010 (RM196,720).

In Table 2, the output contains information that is useful for understanding the descriptive

qualities of the data.

The estimated regression equation can be written in a standard format as illustrated below:

Y= -24.191 +0.172X1 – 0.004X2 +1.937X3 – 0.004X4 + 0.002X5 + 0.002X6

(-6.438)* (4.274)* (-0.675) (7.569)* (-1.593) (0.653) (3.895)*

R2 = 0.981

F statistic = 287.093

Figures in parenthesis denote t-statistics

*denotes rejection of the null hypothesis at the 1% level of significance

Y = housing price

X1 = ln(GDP)

X2 = ln(cost of construction)

X3 = ln(population)

X4 = inflation rate

X5 = interest rate

X6 = RPGT

From Table 3, it is apparent that the gross domestic product (GDP), population and real property

gains tax (RPGT) have a significant relationship with the housing price in Malaysia.

The GDP is found to be significantly and positively correlated with the housing price in

Malaysia. The increase in the GDP is because of the increase in personal consumption. The result

is consistent with research conducted by Qing (2010) showing that housing investment is part of




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the GDP. Therefore, an increase in investment will lead to an increase in the GDP. According to

Chioma (2009), there is a causal relationship between the gross domestic product, which can be

measured as economic growth, and the consumption expenditure, which grows as a result of the

increase in consumption expenditure.

Another finding of this study indicates that the population is significantly and positively

correlated with the housing price. This could be due to the fact that when the number of family

members increases, they definitely need more houses in which to live. Nowadays, the young

generation prefers to work in urban areas, and will buy a house near to the place of work. The

demand from citizens will also affect the housing price. When the demand is greater than the

supply, it will cause the housing price to increase (Agus, 1997). As we know, building a large

number of houses will take a very long time. The constructors might face restrictions on the supply

of land in the area, finding a strategy location to build the houses and the type, density and timing

of the development (Monk, 1996; Asiah, 1999). Those are the factors that constructors have to take

into consideration. For example, there is limited land in Kuala Lumpur and the population is very

large. Therefore, they cannot strike a balance between the supply of housing and the demand for

housing. The Malaysian housing environment is different from that in some developed countries,

as in Malaysia lower-income earners are not provided with social security and they are required to

find their own accommodation. Conversely, in the UK, the Government provides housing benefit

to those earning a lower income. Therefore, an increase in the population in the UK will not affect

the housing price too greatly.

The result also reveals that the RPGT is negatively and significantly associated with the housing

price. The finding contradicts the previous study. Normally, when a government increases the tax

on certain products, it affects the demand for those products, such as alcohol, foreign cars and so

on. This is because citizens have to spend more money to obtain the product and this will create a

burden for them. Surprisingly, the Government’s reimposition of the RPGT on 1 January 2010 has

not affected the housing price in Malaysia. This is because the 5% RPGT imposed by the Malaysian

Government is too little for speculators or high-income citizens. They are willing to pay the

additional 5% tax to the Government when they realize the gain from selling a house after deducting

all the costs. In addition, they expect the gain from housing price appreciation to be great enough

to cover the RPGT and still provide them with an attractive profit.

The finding shows that there is no significant relationship between the interest rate and the

housing price. As we know, if everyone is seeking the same thing, buyers or speculators will not

care about the interest rate charged by financial banks, as the demand and supply are unbalanced,




423


particularly during a good economy. This situation is also due to the fact that investors are confident

and optimistic about the housing market. From the speculators’ perspective, they might not hold

the houses for the long term and they will sell them in the short term. As a result, they might receive

the gain more than the cost. From the buyers’ perspective, they are willing to pay more to obtain

their desired type of house. Nowadays, constructors try to develop or design a number of houses

based on the customer demand, such as a security service, playground and so on. Therefore, it is an

undeniable fact that the price of the houses will increase.

5. Conclusion

In this research, 120 samples of data were collected from Bursa Malaysia, the Statistics

Department in Malaysia and Datastream. All the macroeconomic variables are on a monthly basis,

from 2001 to 2010. The research was conducted to verify the relationship between macroeconomic

variables and housing prices in Malaysia. Only three macroeconomic variables (GDP, population

and RPGT) were found to be positively and significantly correlated with the housing price. The

result is not surprising due to Wheeler and Chowdhury’s (1993) statement that the GDP has a link

with the macroeconomic activity in the housing market, and based on the previous researchers Hii,

Latif and Nasir (1999), a fluctuation in the GDP has a significant relationship with the housing

price.

Besides that, housing prices are related to the population. An increase in the population in

Malaysia increases the housing demand and therefore increases the housing price. If there is a

greater demand than a supply for housing, it will affect the housing price too. When there are fewer

houses in the market, people are willing to spend more money to buy a house. This will cause the

housing price to increase. However, those with a lower income cannot afford to buy a house, and

are forced to rent a house or stay with their parents after marriage. In the 2010 budget, the

Government reimposed the RPGT of 5% for those who sell their house within 5 years after

purchasing it. The purpose of reimposing the RPGT is to discourage speculators from selling their

house within 5 years. In addition, the Government wants to protect lower-income earners in

obtaining their first house.

In future studies, other measurements of the increase in the housing price in Malaysia, such as

investment, economy and personal income, can be used. However, in this research, these variables

are not included. Also, a limited number of studies have included these three variables

simultaneously. In the future, it is hoped that other researchers will pursue the fluctuation in housing

prices and those variables mentioned above. Besides, this research does not attempt to link the




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housing price to the length of time in which the house was built with the fluctuation; however, this

is suggested to be pursued in the future.

Table 1: House Prices and Annual Change from 2000 to 2010

Year

(Quarter 4)

Index 2000 = 100 Change Over

12 Months

(%)

All House

Pricing (RM)

2001 101.9 0.3 141,494

2002 107.3 5.3 148,201

2003 111.2 3.7 153,580

2004 114.0 2.6 157,461

2005 116.9 2.6 161,500

2006 122.4 4.8 169,112

2007 125.9 2.9 174,410

2008 129.0 2.5 178,632

2009 136.1 5.6 188,542

2010 146.9 8.0 203,495

Table 2: Descriptive Analysis

Minimum Maximum Mean Std Deviation

ln(Housing Price) 11.84 12.23 12.0115 .10445

ln(GDP) 18.26 19.13 18.7158 .27023

ln(Cost of

Construction) 18.02 20.91 20.2960 .54351

ln(Population) 16.99 17.12 17.0570 .04052

Inflation Rate (%) 4 8 6.26 1.203

Interest Rate (%) 3.2 7.7 5.742 1.0218

RPGT (%) 0 30 10.50 11.865

Valid N (120)




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Table 3: Coefficientsa

Unstandardized

Coefficients

Standardized

Coefficients

Collinearity

Statistics

B

Std

Error

Beta t Sig. Tolerance VIF

(Constant) -24.191 3.757

-

6.438 .000

ln(GDP) .172 .040 .446 4.274 .000 .107 2.358

ln(Cost of

Construction) -.004 .005 -.019 -.675 .505

.134 5.459

ln(Population) 1.937 .256 .752 7.569 .000 .151 3.610

Inflation Rate -.004 .003 -.046

-

1.593 .121

.092 4.868

Interest Rate .002 .003 .020 .653 .518 .087 8.780

RPGT(%) .002 .000 .219 3.895 .000 .167 6.125

Dependent variable: Housing price

Graph 1: Housing Prices in Malaysia from 2001 to 2010

0

50,000

100,000

150,000

200,000

250,000

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year (Quarterly)

Hou

sing P

rices in M

ala

ysia




426


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