Monday, September 26, 2016

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.


  1. Thanks for the data. Great analysis as always. Just a couple of questions:

    1) Is there a divergence between the growth in monthly income vs monthly installments for the 25-34 age group?

    2) Would this then increase demand for rented housing instead of purchased housing?

    3) I think there is a correlation between purchase price and rental demand as well, but the demand for purchased housing would probably come from other sources instead of the 25-34 age group.

    1. @Shihong

      1. No idea. BNM would have the loan data, but they're not telling.

      2. In GKL, I should think so. Home ownership in Kl is less than 55%, compared to the 70% national average

      3. My approach isn't terribly scientific, and I'm not making the claim that housing demand ONLY comes from the 25-34 age group. However, I think it is indicative of demand outstripping supply. It would be the same whichever working age group you care to include.

  2. Hisham,

    Thx for another great topic for discussion! My thoughts:

    1) I have one problem of defining supply by using ONLY the existing stock figures. The existing stock is, by definition, the total unsold units in the primary market (developers), but there's a second source of supply -- unoccupied units in the existing market.

    Remember, buying is not the only source of demand, there's renting as well. Rental prices indirectly affect property prices too as investors require certain level of rental yield.

    Although there's no official figure for reference, it's not a secret that many houses in Malaysia are unoccupied, especially high-rise houses (check the famous "lights on at night" observation). In that sense, the supply is actually rampant.

    I'm a tenant staying in Damansara Perdana. Rental rates have been super competitive recently as there are too many houses for just few tenants, rental rates are down 20-30% this year based on my surveys, investors are in mild panicking mode (unsure on selling the units or renting out at desperate rates), and more upcoming supplies are coming in the next 1-2 years, hence rates of older buildings will continue to go down.

    Bottom line: I think Malaysia housing is somewhat oversupplied, based on my unofficial secondary market observation.

    2) That said, is the property market a bubble now? Before I give my answer, let's talk about how bubble "works".

    Essentially, a bubble bursts when desperate sellers SIGNIFICANTLY outnumber desperate buyers, like 5 to 1 or more.

    Typically, property owners don't voluntarily sell their units at desperate price. The main reason to force them selling desperately is -- foreclosure by bank.

    It takes a really huge effort to build up the path to massive foreclosure by bank throughout the country, I don't think we are there yet. The only "hope" for a property bubble burst in Malaysia is to have a huge collective loan defaults by the property speculators, for whatever reason. Will there be such a Black Swan in Malaysia soon? Maybe, maybe not, I don't know (that's why we call it Black Swan).

    Bottom line: Intuitive guess -- not a property bubble yet.

    3) Overall bottom line: disagree that property market is not oversupplied; cautiously agree that we are not in bubble zone.

    1. @Fung

      1. Actually the existing stock covers both sold as well as unsold inventory. What I'm tracking here is the change in total stock of housing (used or unused), not just the primary market. But you make a good point.

      However, when we talk of the housing market, we're actually talking about an aggregation of a number of different sub-markets. I certainly won't dispute the fact of over supply in some segments, but typically these are higher cost units that have a much more limited market.

      If you actually look into the details of property launches, it's obvious that since 2008, developers have shifted to building a more limited number of higher value (and higher margin) units, and much less of units aimed at a mass market. And then there's all those condos in Johore Bahru. On the other hand, construction of low cost housing nearly fell to zero.

      So we have an even bigger schism between supply and demand, as much of the supply is of houses/apartments very few can afford, which exacerbates the price pressures, particularly at the lower end where most of the population pressure actually is.

      Written three years ago, but still pretty relevant I think:

    2. Haha sorry for my ignorance. I took the word 'stock' from accounting dictionary lol.

      Anyway, excellent response from you. Thx :)

  3. @ Fung, it is not a black swan event. it is coming.

    1. black swam is a totally unexpected event e.g. another tsunami at Sumatra worst than the last, EU totally break apart, China suddenly melt down and communist loses power.....

    2. Zuo De,

      You expect it to come, so you don't call it Black Swan; I don't expect it to come (can't find the reason), so I call it Black Swan.

  4. Hisham, do you account for the difference in terms of the housing market? For eg, in iskandar malaysia there are plenty of vacant units or units bought by property speculators. It seems that developers arent catering to the people who truly need housing and the supply is for a different market segment, thus causing the dd ss mismatch.

    1. @Jon

      See my last answer to Fung above. Basically it addresses the same issue you brought up.