Reasons for the Increment in Housing Prices in Malaysia

Introduction In recent years, certain parties have pointed out that housing prices have increased tremendously. While it is contentious whether or not such a trend exists, the general consensus is that the prices of properties in general have indeed increased, to a certain extent (as seen in the table below). Various parties have come to argue that such an increase in property prices is due to widespread speculation practised by a majority of the buyers. Other parties however argue that it is purely due to inflationary forces. In the sections that follow, we shall investigate what exactly drives the appreciation of property prices.

One widely-accepted model in economics pertaining to the question at hand, would be the “supply and demand” model. This model dictates that in a competitive market, the price of a certain good (in this case, houses) will vary until it settles at price such that the quantity demanded by the buyers equals the quantity supplied by the producers. This price is known as the equilibrium price, and the corresponding quantity, the equilibrium quantity. [pic] Using the model, it can be seen that any shift upwards of the demand would cause a corresponding increase of both the equilibrium price and equilibrium quantity.

Among the catalysts that dictate such a shift in the demand curve would be the healthy liquidity in the Malaysian banking system. As suggested by SM Sabri (2005), Malaysian banks have shown remarkable discipline and commitment in liquidity management through satisfying the minimum requirements set by the “New Liquidity Framework” (NLF) with their own methods such as the “Maximum Cash Outflow” (MCO) as well as early warning systems. This ample amount of liquidity even after the global financial crisis of 2008 and 2009 has enabled financial institutions to ease on the mortgage requirements.

Source: Malaysia Base Lending Rate Local citizens and foreigners are able to ask for bank loan when they are buying or investing in house property in Malaysia. The table above shows the Malaysia base lending rate that is authorised by the Bank Negara Malaysia which determine the lowest rate that a bank can offers to the applicants and all banks in Malaysia are required to follow the rate when they deal with house loans. It can be seen that in 1998 where Malaysia was hit by economical crisis, the bank lending rate was the highest in history which is 12. 27%. The rate was decreased gradually to 6. 0% in year 2011 and this attracts more investments in house property in Malaysia. Investors and citizens are able to enjoy the lower mortgage rate when they buy a house and it causes the demand of property to increase. The government does promote the ownership of houses with the introduction of the My First House Scheme to the citizens with household income less than RM 3000. A 100% loan will be given to the buyers and Cagamas Bhd will pay the 10% down payment for the houses. This attracts the new buyers in the market and it will add to the demand of the number of buyers.

Apart from that, the relative political stability in the country and good governance has given buyers confidence in the local economy. For instance, Malaysia was ranked the safest nation in South East Asia, fourth safest in the Asia Pacific and 19th safest and peaceful out of 153 countries in the world (Source Global Peace Index 2011). This data is a testament to the various positive polices introduced by the government to promote peace and overall economic well-being. As a result, the expectations for property investors local and foreign, remains bright.