Demand For Housing

My latest column in the Star (excerpt):

Danger of dip in demand lurks

RECENTLY, the Urban Wellbeing, Housing and Local Government Ministry proposed allowing housing developers to extend loans to homebuyers. One common refrain in support of this policy and for house buying in general is that “house prices only go up”.

In one sense, this is rational. Land is the biggest single input into house prices and land isn’t being made anymore (bar the occasional land reclamation or undersea volcano eruption). Global warming is raising sea levels, which reduces available land even further. But this is entirely a supply side argument.

Historically, there have been periods where house prices have not gone up or even gone into retreat. There is nothing inherently special about the housing market in that respect. The global financial crisis was partly triggered by a US housing bubble that burst, as house prices fell over 20% from their peak in 2007 and took eight years to recover.

Europe saw much of the same trend, with Spain and Ireland seeing house prices retreating in excess of 30%. The earlier crash of Japan’s 1980s bubble saw prices dropping 10% to 15% in major cities and not recovering for decades.

Closer to home, house prices barely kept pace with inflation in the decade after the Asian Financial Crisis, which started in 1997. High-rise properties performed the worst, with price increases actually below the inflation rate. It was only after 2009 that house prices took off across all segments.

Just as with economic growth, we need to examine the underlying demand and supply factors. And just as with economic growth, house prices will not always increase….

They didn’t have space to put in some of the charts I compiled, so I’m posting them here:

One reason why I don’t think there’s a housing “bubble” in Malaysia is that there’s a fundamental divergence between supply and demand. The potential demand from first time home buyers (here defined as individuals aged 25-34) will peak in the next five years – the 5-year compound annual growth rate of this segment of the population rose from 2.1% in 2005, to 3.75% in 2010, and 3.1% in 2015. In the meantime, the CAGR of the supply of housing fell from 5.1% (calculated for the four years from 2002-2005 due to data limitations) to 2.9% to just 1.8% in the same time periods.

Malaysia’s largest age cohort is between 20-24 years of age (based on 2015 figures). This implies the maximum demand pressure for housing will come over the next ten years, as these people move into the work force and start looking for homes. But thereafter, while we’ll continue to see a rise in population size, the pace of increase will slow down notably, and may stop altogether by 2050-2060.

Obviously, there’s more than one factor affecting house prices (such as the fall in lending rates), especially in explaining the drop in supply. But the demographic situation does explain the pent up demand, as well the reason why this has become such a pressing political topic.

My fear is that, without taking into consideration changes on the demand side, we’ll come up with policies on the basis that house prices will continue to appreciate in the future, which might not be true.