Housing, Inflation and the Cost of Living

I came across a couple of really good articles over the last couple of days on the subject of housing, inflation and GDP that I wanted to share (jump to the end for a summary of both articles).

First, the treatment of housing in the construction of the Consumer Price Index, which is commonly used to measure inflation (excerpt):

Headline inflation measures shouldn’t ignore costs of home ownership
Mojmir Hampl, Tomas Havranek 12 September 2017

Statistical offices of many countries measure the costs of home ownership by computing imputed rents, which are then included in headline inflation measures. This is the case for the US, Japan, and Switzerland, among others. In contrast, the harmonised index of consumer prices (HICP) – the EU’s most important inflation statistic – excludes owner-occupied housing, for the technical reason that imputed transactions are inconsistent with the definition of the HICP, and a more complex approach based on net acquisitions would be required (Eurostat 2012, 2013).….

…Because house purchases involve a substantial investment component, their inclusion in headline inflation makes many statisticians uneasy. Conceptually, however, homes are a special case of durable goods, because they provide a claim on a stream of future services. Cecchetti (2007), for example, showed the long-term capital gain from home ownership is very small….

The (Un)affordability of Housing

I’ve been planning on posting this for a while now, but came across this article this past weekend, which provides the perfect entree (excerpt):

Property market bubble set to burst, says think tank

PETALING JAYA: The property bubble in Malaysia is set to burst, but the government must resist the temptation to intervene and allow market forces to coordinate supply and demand, says a think tank.

In an interview with FMT, the Institute for Democracy and Economic Affairs’ (IDEAS) senior fellow, Carmelo Ferlito explained the two “economic dynamics” which have resulted in the current property situation in the country, where the prices of homes are beyond the reach of most and the oversupply of such homes, has led to many being left unsold.

Figures from the National Property Information Centre (Napic) have indicated that as of the first quarter of 2017, some RM10.08 billion worth of residential units are unsold in Malaysia. This figure does not include serviced apartments, which have since 2015, been classified as commercial properties.

State of the Households II

I was at the launch ceremony at Khazanah Research yesterday, and while the report doesn’t present anything new, it compiles all the various statistics domestically available into one document to present a holistic picture of Malaysian households.

You can download the report here.

Oh, and I love the new interactive socio-economic map of Malaysia!

Thanks go to @Inequality_MYS for the invite.

Malaysia's National Savings

As a follow up to yesterday’s post, here’s some graphs showing some of the other interesting data from the distribution of income accounts.

First, gross savings across all institutional sectors (RM billions):

Note that the bulk of national savings actually comes from corporations (the first two sectors). Household savings is by comparison pretty small.

Malaysia’s Household Savings Rate

The question of the household savings rate has come up a few times in the last few weeks, so I thought I might as well set out the data and evidence for it.

At this stage, I have a confession to make. I was under the impression that gross savings excluded net changes in pension assets (contributions less withdrawals from EPF, KWAP, LTAT and the like), but a closer reading of the accounts and the SNA2008 manual showed that this is already captured under the income accounts. For that I have to apologise to everyone whom I told that the household savings rate would be substantially higher if the net pension contributions were taken into account. In fact, the opposite is true and the difference is quite significant, as I’ll demonstrate in a bit.

Dato’ Charon on the State of Malaysian Households

Khazanah Research Institute is a new policy think tank that just started up last year. Here's their MD on their first publication, "The State of Households" in Malaysia:

Your browser does not support native audio, but you can download this MP3 to listen on your device.

You can download the report here, and the Executive Summary here.

There's really no big surprises in the report (at least for me), but the KRIS report does a great job of showcasing the data in a very impactful way, for example showing the differences in access to public goods between rich states and poor states. I absolutely love two of the charts they came up with - household expenditure by income strata and category (pg 18) and GDP per capita comparing both states and cities internationally (pg 8). KL for instance, has a GDP per capita equivalent to Korea's and within striking distance of Seoul, but is nearly 2.5x the Malaysian average and almost 7x that of Kelantan. The Klang Valley is almost literally a different country from the rest of Malaysia.

Explaining Household Income

DS Wahid’s announcement over the preliminary results of the 2014 Household Income Survey (HIS) has created a minor furore (excerpt):

RM5,900 average household income? Lies, damned lies, and statistics, says MP

KUALA LUMPUR, Sept 9 ― The federal minister's claim that Malaysian households make an average of RM5,900 monthly is a farce that does not represent the actual earning capacity of most Malaysians, an opposition lawmaker said today.

DAP's Bukit Mertajam MP Steven Sim said the figure is a result of creative use of statistics in the 2014 Household income Survey (HIS) preliminary report to paint a “dishonest” picture of increased prosperity among the people….

…On Sunday, Minister in the Prime Minister's Department Datuk Seri Abdul Wahid Omar was quoted by national news wire Bernama as saying that the average household income in the country has risen to over RM5,900 a month, a significant increase from the RM5,000 monthly average recorded in the 2012 HIS.

Sim stressed that the figure does not make sense when the government itself admitted that 80 per cent of Malaysian households had benefitted from the Bantuan Rakyat 1Malaysia (BR1M) cash aid programme, whose recipients must earn less than RM3,000 a month.

He added that government statistics also showed that 82.5 per cent of Malaysians below the age of 30 earn less than RM3,000 a month as at September last year….

…Sim stressed that the median household income in Malaysia ― which stood at RM3,626 in the 2012 HIS ― gives a clearer idea of how much Malaysian households actually earn as it differentiates between low and high income earners….

Aiming For High Wages

There are going to be some scheduling and other changes to my blog posts from now on, as I’m inordinately busy and won’t have as much time to post as I used to. Things will be slow for the next few weeks/months until I get a handle on new responsibilities.

In the meantime, via IMoney.my is some info on the highest paying jobs in Malaysia at different levels of the economy. Hint: doing medicine pays off, but you might be surprised at what really pays at the senior level.

Household Responses To Changes In Income

This is technical, but very useful for those of us having to analyse the Malaysian economy (abstract):

The Marginal Propensity to Consume across Household Income Groups
Dhruva Murugasu, Ang Jian Wei, Tng Boon Hwa

Understanding heterogeneity in the way households respond to income changes is crucial for policymaking, as shocks in the economy often affect specific groups of households differently. Using data from the Household Expenditure Survey (HES), this paper estimates the marginal propensity to consume (MPC) out of disposable income for Malaysian households and examines how the propensities differ across income brackets. We find evidence that the MPC out of disposable income for lower income households is higher than that for higher income households. The MPCs vary from 0.81 for those earning below RM1,000 to 0.25 for those earning above RM10,000. These MPCs allow policymakers in Malaysia to estimate more precisely the aggregate consumption effects of income shocks that affect households of specific income groups.

For those not familiar with the terminology, the MPC is basically a ratio of how much is spent from an extra Ringgit of income. For instance, as quoted above, 81% of an additional Ringgit of income is spent for households earning below RM1,000 (full results are available on page 11). Note that this is the marginal propensity to consume, not the average, which would be considerably higher.

In any case, props to BNM for publishing, and can we have more papers like this please?

Technical Notes:

Dhruva Murugasu, Ang Jian Wei, Tng Boon Hwa, "The Marginal Propensity to Consume across Household Income Groups", Bank Negara Malaysia Working Paper Series WP2/2013, December 2013 (warning: pdf link)

Who’s Doing The Saving?

This recent paper from the World Bank confirms something I’ve suspected and been concerned about for a long time (abstract):

What are the causes of the growing trend of excess savings of the corporate sector in developed countries ? an empirical analysis of three hypotheses
Leandro Brufman, Lisana Martinez & Rodrigo Perez Artica

Summary: This paper analyzes annual accounting data for a sample of 5,000 publicly traded manufacturing firms from Germany, France, Italy, Japan, and the United Kingdom. The analysis uses data from 1997 to 2011 and finds an increasing trend of excess savings (defined as the difference between gross saving and capital formation) and a gradual decline of gross capital formation. This trend is accompanied by a steady deleveraging process and a decrease in the share of operating assets in total assets. This process is more acute among the more credit constrained, the more volatile, and the less dynamic firms.

People First?

I read this article last week, but something about it really bothered me. It was like an itch I couldn’t scratch. I only figured out what was wrong yesterday (excerpt; emphasis added):

Time govt lived up to its slogans, says MIER chief

KUALA LUMPUR (June 28): Malaysia's economic policies need to be implemented in line with the government's slogan of 'People First,' which means the people should be the ones benefitting "firstly and mostly," the chief of the Malaysian Institute of Economic Research (MIER) said.

Unfortunately, this is not the case, pointed out Dr Zakariah Abdul Rashid, who is executive director of the think tank.

In an exclusive interview with fz.com, Zakariah touched on various issues, including the importance of interpreting economic indicators carefully, the widening gap between the rich and poor, doing away with race-based assistance and the importance of being competitive in choosing our leaders...

Wages and GNI

From the latest round of NBER working papers (abstract):

Declining Labor Shares and the Global Rise of Corporate Savings
Loukas Karabarbounis, Brent Neiman

We document a 5 percentage point decline in the share of global corporate income paid to labor from the mid-1970s to the late 2000s. Increased dividend payments did not absorb all of the resulting increase in profits, and therefore, the supply of corporate savings increased by over 20 percentage points as a share of total global savings. These trends were stronger in countries experiencing greater declines in the relative price of investment goods. We develop a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and the sectoral composition of savings affects macroeconomic allocations. We calibrate the shape of the production function and the capital market imperfections to match the cross-sectional variation in the two trends. In response to the observed global decline in investment prices, our model generates more than half of the observed changes in labor shares and corporate savings. The non-unitary elasticity of substitution between capital and labor interacts with imperfections in the capital market to jointly shape the economy’s dynamics.