The Economy and the Housing Market

By: Dr. Zulkiply Omar

Senior Research Fellow

Malaysian Institute of Economic

Research (MIER)

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The Malaysian Economy

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The World Economy

GDP Growth (% y-o-y)Projections

2016 2017 2018 2019

World 3.2 3.7 3.9 3.9

Advanced Economies 1.7 2.4 2.4 2.2

Emerging Market and

Developing Economies4.4 4.7 4.9 5.1

World Trade Volume (goods

and services)2.2 5.1 4.8 4.5

Source: International Monetary Fund (IMF), World Economic Outlook July 2018

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The Malaysian Economy: Real GDP by Expenditure Components at Constant 2010 prices

Source: DOSM

% ∆ year-on-year 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18

Private Consumption 6.0 6.7 7.1 7.2 7.0 7.0 6.9 8.0

Public Consumption 0.9 7.5 3.3 3.9 6.8 5.4 0.4 3.1

Gross Fixed Capital Formation 2.7 10.0 4.1 6.7 4.3 6.2 0.1 2.2

Private Investment 4.3 12.9 7.4 7.9 9.2 9.3 0.5 6.1

Public Investment (0.5) 3.2 (5.0) 4.1 (1.4) 0.1 (1.0) (9.8)

Domestic Demand 4.3 7.7 5.7 6.6 6.2 6.5 4.1 5.6

Net Exports of Goods &

Services1.7 (15.3) 1.9 2.0 2.3 (1.9) 62.4 1.7

Exports of Goods & Services 1.3 9.8 9.4 11.8 6.7 9.4 3.7 2.0

Imports of Goods & Services 1.3 13.0 10.4 13.3 7.3 10.9 (2.0) 2.1

Real GDP 4.2 5.6 5.8 6.2 5.9 5.9 5.4 4.5

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Industrial Production Index (Manufacturing)

Source: Department of Statistics Malaysia (DOSM)

0.0

2.0

4.0

6.0

8.0

10.0

% change y-o-y

Manufacturing Export-oriented industries Domestic-oriented industries

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International Trade

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000% change y-o-yRM Million

Trade Balance (LHS) Export (RHS) Import (RHS)

Source: Department of Statistics Malaysia (DOSM)

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PMI: Export Order Surveys & World Trade Volumes

Source: Capital Economics

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Malaysia: Balance of Payments (RM million)

Source: Bank Negara Malaysia (BNM)

Department of Statistics Malaysia (DOSM)

* Ministry Of Finance (MOF), Economic Report 2017/2018

Net 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18 2018*

Current Account 4,786 8,772 12,800 13,916 40,275 14,977 3,909 32,940

(% of GNI) 1.5 2.7 3.8 4.0 3.1 4.5 1.2 2.3

Goods 25,010 26,027 31,672 34,056 116,766 35,681 26,055 114,374

Services (6,171) (4,849) (4,823) (6,972) (22,815) (5,846) (6,180) (22,689)

Primary Income (10,147) (8,168) (9,631) (8,408) (36,354) (10,192) (11,230) (41,023)

Secondary Income (3,905) (4,238) (4,418) (4,761) (17,322) (4,666) (4,736) (17,723)

Capital Account 17 (1) (20) (23) (27) (25) (37) -

Financial Account (8,313) 8,986 (2,837) 5,965 3,800 15,236 9,151 -

Direct Investment 9,209 (7,147) 8,772 5,300 16,134 10,704 (715) -

Abroad (8,028) (15,810) (2,964) 1,894 (24,907) (1,276) (3,558) -

In Malaysia 17,237 8,663 11,736 3,405 41,041 11,980 2,843 -

Portfolio Investment (32,374) 17,513 (9,094) 11,639 (12,316) (2,638) (38,272) -

Financial Derivatives 646 (286) 983 (1,452) (109) 753 (213) -

Other Investment 14,206 (1,094) (3,498) (9,523) 92 6,417 48,352 -

Error & Omissions 1,333 (7,474) (3,759) (17,739) (27,639) (11,997) (13,912) -

Overall Balance (2,178) 10,283 6,184 2,119 16,409 18,191 (888.1) -

International Reserves (USD) 95.4 98.9 101.2 102.4 102.4 107.8 104.7 -

Retained import (months) 8.3 7.9 7.6 7.2 7.2 7.4 7.5 -

Res./S-term external debt

(times)1.1 1.1 1.1 1.1 1.1 1.1 -

:

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The Economy: Summary

: ○ The world economy is expected to grow at slower pace as global demand is moderating

○ Global trade flows slowing down

○ High oil prices bad news for energy importing economies

○ US-China trade war – knock-on effect

○ Financial market volatility – short-term capital outflows from EMDEs due to policy normalization in developed countries

○ Strong USD exchange rate

○ Over relying on private consumption of domestic demand

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HousingMarket

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Housing Market: The Issues

:

○Imperfect market

○Oversupply

○Price downward stickiness

○Supply-demand mismatch

○Is price really high?

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House Prices vs Household Income, 2009-2016 (RM)

Source: Malaysian House Price Index (MHPI), NAPIC

Department of Statistics Malaysia (DOSM)

Note: 1 Data as in 2016 due to limitation of data

1StateMean House Price Mean Household Income

2009 2016 CAGR (%) 2009 2016 CAGR (%)

Malaysia 184,002 379,843 10.9 4,025 6,958 8.1

Johor 137,896 301,887 11.8 3,835 6,928 8.8

Kedah 115,951 192,595 7.5 2,667 4,971 9.3

Kelantan 113,642 156,285 4.7 2,536 4,214 7.5

Melaka 122,476 156,876 3.6 4,184 6,849 7.3

Negeri Sembilan 123,906 187,858 6.1 3,540 5,887 7.5

Pahang 132,849 221,129 7.6 3,279 5,012 6.2

Perak 112,620 218,009 9.9 4,407 5,065 2.0

Perlis 99,405 164,504 7.5 2,809 4,998 8.6

Pulau Pinang 209,834 405,195 9.9 2,617 6,771 14.5

Selangor 263,312 430,920 7.3 5,962 9,463 6.8

Terengganu 129,874 263,505 10.6 3,017 5,776 9.7

W.P. Kuala Lumpur 388,430 732,257 9.5 5,488 11,692 11.4

Sabah 284,973 405,956 5.2 3,102 5,354 8.1

Sarawak 243,815 402,847 7.4 3,581 5,387 6.0

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StateElasticity

Price Income

Malaysia -0.5 -1.3

Johor -0.9 -2.8

Kedah -0.2 0.4

Kelantan -21.9 2.5

Melaka -5.5 -0.8

Negeri Sembilan -0.7 -1.8

Pahang -0.7 -0.6

Perak -1.1 -0.6

Perlis -2.6 -2.9

Pulau Pinang -1.5 -2.2

Selangor -3.3 -2.2

Terengganu -0.2 -1.1

W.P. Kuala Lumpur -1.7 -1.3

Sabah 22.1 -0.1

Sarawak -0.8 -2.6

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Elasticity of Housing Demand

Source: Malaysian House Price Index (MHPI), NAPIC

Department of Statistics Malaysia (DOSM)

Note: 1 Data as in 2016 due to limitation of data

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Elasticity of Housing Demand

: ○ Price elasticity of demand: percentage change in quantity demanded given one percent change in price: negatively related

○ At the national level is not elastic

○ Income elasticity of demand: percentage change in quantity demanded given one percent change in income: positively related

○Wrong sign: income increase, quantity demanded decreases

○ Reflection of the market rather than consumer behaviour

○ It relates to the affordability issue

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Affordability Measure

:

○ The house-price-to-income multiple: the ratio between median house price and median annual household income, also known as the median multiple

○

𝑀𝑒𝑑𝑖𝑎𝑛 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑒 = ൗMedian house priceMedian annual household income

○ Rule of thumb: median multiple of 3.0 times or less is considered a very good marker for housing affordability

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Price-to-Income Ratio Based on Income Classes, 2017

Source: Property Market Report, NAPIC

Department of Statistics Malaysia (DOSM)

Note: Income class data as in 2016 due to limitation of data

State Bottom 40% Middle 40% Top 20%

Malaysia 8.4 4.0 1.9

Johor 8.3 4.3 2.3

Kedah 7.7 3.7 1.7

Kelantan 9.1 4.7 2.0

Melaka 4.8 2.5 1.4

Negeri Sembilan 8.8 4.3 2.1

Pahang 7.4 4.3 2.2

Pulau Pinang 5.6 2.9 1.5

Perak 8.1 4.1 2.0

Perlis 11.7 6.3 3.3

Selangor 7.6 3.9 1.9

Terengganu 7.2 4.1 2.1

W.P. Kuala Lumpur 8.3 4.2 2.2

W.P. Labuan 6.5 3.3 1.6

W.P. Putrajaya 11.0 6.9 3.0

Sabah 11.5 5.2 2.3

Sarawak 9.5 4.3 2.0

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Types of Residential and Price Range

Cluster House

Detached House

Condominium Semi-detached

House

Townhouse

Terrace Low-cost Terrace

Flat Low-cost Flat

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Median House Prices, 2017

TypesW.P.

Kuala LumpurSelangor

Cluster House 230,000 575,000

Condominium/ Apartment 578,000 338,000

Detached House 2,900,000 692,500

Flat 200,000 180,000

Low-Cost Flat 158,000 133,000

Low-Cost House 320,000 215,000

Semi-Detached House 2,500,000 900,000

Terraced House 800,000 515,750

Town Houses 746,000 380,000

Source: The Residential Prices, NAPIC

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W.P. Kuala Lumpur

TypesCluster

House

Condominium

/Apartment

Detached

HouseFlat

Low-Cost

Flat

Low-Cost

House

Semi-

Detached

House

Terraced

House

Town

Houses

Bottom

40%3.6 9.0 45.2 3.1 2.5 5.0 39.0 12.5 11.6

Middle 40% 1.8 4.6 22.9 1.6 1.2 2.5 19.7 6.3 5.9

Top 20% 0.9 2.4 12.0 0.8 0.7 1.3 10.3 3.3 3.1

Selangor

TypesCluster

House

Condominium

/Apartment

Detached

HouseFlat

Low-Cost

Flat

Low-Cost

House

Semi-

Detached

House

Terraced

House

Town

Houses

Bottom

40%10.9 6.4 13.1 3.4 2.5 4.1 17.1 9.8 7.2

Middle 40% 5.6 3.3 6.7 1.7 1.3 2.1 8.7 5.0 3.7

Top 20% 2.8 1.6 3.3 0.9 0.6 1.0 4.3 2.5 1.8

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Price-to-Income Ratio by Type of Residential and Income Classes, 2017

Source: Property Market Report, NAPIC

Department of Statistics Malaysia (DOSM)

Note: Income class data as in 2016 due to limitation of data

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○House affordability is the income issue rather than price

○Therefore, addressing cost or/and prices is not a total solution

○The housing market is not perfect competition and it will never be

○Therefore, the affordability issue cannot be totally addressed through market solution

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Conclusion

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