JEIEJB - Tze San Ong PDF

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

Volume:1 No.5 May 2013
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: tzesan1108@gmail.com
______________________________________________________________________________
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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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 600,000800,000 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 boombust 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 longrun 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 Governments 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.
420

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 Governments 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,
422

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 Chowdhurys (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
Index 2000 = 100
(Quarter 4)
Change Over
All House
12 Months
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
18.02
20.91
20.2960
.54351
16.99
17.12
17.0570
.04052
Inflation Rate (%) 4
6.26
1.203
Interest Rate (%)
3.2
7.7
5.742
1.0218
RPGT (%)
30
10.50
11.865
ln(Cost
of
Construction)
ln(Population)
Valid N (120)
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Table 3: Coefficientsa
Unstandardized Standardized
Collinearity
Coefficients
Statistics
Coefficients
Std
Beta
Sig.
Tolerance VIF
Error
-24.191
3.757
.172
.040
.446
4.274 .000 .107
2.358
-.004
.005
-.019
-.675
.134
5.459
ln(Population) 1.937
.256
.752
7.569 .000 .151
3.610
-.004
.003
-.046
.092
4.868
Interest Rate
.002
.003
.020
.653
.518 .087
8.780
RPGT(%)
.002
.000
.219
3.895 .000 .167
6.125
(Constant)
ln(GDP)
ln(Cost
of
Construction)
Inflation Rate
6.438
1.593
.000
.505
.121
Dependent variable: Housing price

Graph 1: Housing Prices in Malaysia from 2001 to 2010
250,000
2001
2002
Housing Prices in Malaysia
200,000
2003
2004
150,000
2005
2006
100,000
2007
50,000
2008
2009
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
2010
Year (Quarterly)
425

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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

An Online International Monthly Journal (ISSN: 2306 367X)

Factors Affecting the Price of Housing in Malaysia

Tze San Ong

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

2. Housing Price Determinants

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

3. Research Variables and Operationalization

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

The regression model can be built as below:

4. Result and Discussion

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Index 2000 = 100

Table 2: Descriptive Analysis

Inflation Rate (%) 4

Interest Rate (%)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

4.274 .000 .107

7.569 .000 .151

3.895 .000 .167

Dependent variable: Housing price

Housing Prices in Malaysia

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

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