The Current Analysis Data on the Effects of Rising House Prices on Consumers

and Developers in Malaysia

The economy is slowing, the ringgit is depreciating and the house prices in Malaysia continue
to rise, but at a slower pace, and transactions are slightly down and residential construction activity
is slowing. During the year to end-Q3 2015, the nationwide house price index rose by 5.43% (2.74%
inflation-adjusted), down from an annual rise of 7.88% the previous year and the lowest increase
since Q3 2009, according to the Valuation and Property Services Department (JPPH). On a
quarterly basis, the index increased 0.8% (0.2% inflation-adjusted) in Q3 2015. Malaysias average
house price stood at RM 312,050 in Q3 2015, up by 5.41% (2.72% inflation-adjusted) from a year
earlier.

By property type:

Terraced house average prices rose by 5.4% (2.7% inflation-adjusted) to RM 278,223

during the year to Q3 2015.
High-rise residential properties' average price rose by 6% (3.3% inflation-adjusted) y-
o-y to RM 296,826
Detached house average prices rose by 4.1% (1.4% inflation-adjusted) y-o-y to RM
524,260
Semi-detached house average prices increased 6% (3.3% inflation-adjusted) y-o-y to
RM 469,823

Based from our findings, we found that Negeri Sembilan registered the highest y-o-y house
price increase, at 7.3% (4.6% inflation-adjusted) during the year to end-Q3 2015, followed by
Perlis (7.2%), Sarawak (6.7%), and Perak (6.6%). Other areas with strong annual price rises
included Selangor (6.2%), Kedah (6.1%), Kuala Lumpur (5.3%), Sabah (5.3%), and
Terengganu (5.2%). Modest house price increases were seen in Pulau Pinang (3.5%), Melaka
(3.3%), Pahang (3%), and Johor (3%). Only Kelantan saw a house price decline of 0.2% (-
2.8% inflation-adjusted) during the year to end-Q3 2015.

Kuala Lumpur has the most expensive housing in Malaysia, with an average price of
RM 718,755 in Q3 2015. In contrast, Perlis had the cheapest, at an average house price of
RM156,324. Malaysias property market is expected to remain weak in the coming months,
with house price rises slowing further next year. Malaysias economic growth is expected to
slow to 4.7% this year and to 4.5% in 2016, due to tighter fiscal conditions, according to the
World Bank.
Malaysia House Price Index

Housing Index in Malaysia increased to 5.80 percent in the fourth quarter of 2015 from 5.40
percent in the third quarter of 2015. Housing Index in Malaysia averaged 3.98 percent from
1997 until 2015, reaching an all-time high of 44.50 percent in the first quarter of 2000 and a
record low of -39.20 percent in the third quarter of 1998. Housing Index in Malaysia is reported
by the Central Bank of Malaysia. In Malaysia, Housing Index is measured by the annual change
in the House Price Index and was last updated on April of 2016.

House price change

% change over a year earlier

Source: Valuation and Property Services Department

 Diagram 1

Diagram 2

Equilibrium Point in Housing Market

Definition of equilibrium is a state in which indirect forces or influences are balanced or a state
of the physical balance. (Oxford Dictionary) Equilibrium in economic will happen when the
quantity demanded same with the quantity supplied. Equilibrium also can happen when the
intersection point between demand and supply curve touch together.

Market equilibrium is a tool helps to see how the market adjusting price to meet the
market buying and selling plans. In housing market, equilibrium might be happened when the
market structures are identified or found out. In this housing market industry there are too much
considerable and variable affect the supply and demand.
 A Housing Market with a Rent Ceiling
400000
350000
Rent (RM per unit)

300000
250000
200000 Housing shortage
150000
100000
50000
0
500,000 1,000,000 1,500,000 2,000,000
Quantity (thousands of units)

supply demand rent ceiling

Diagram 3

Based on the result we found, we sketch a simple supply and demand curve to illustrate the
market structure for housing in Malaysia. From the graph we can see that market equilibrium
was set as RM 250,000. If the pricing of the housing set below than the intersection it might
create a shortage of housing in the entire market but in the opposite if it higher than the
intersection might lead to surplus of housing.

Diagram 3 shows the effects of a rent ceiling that is set below the equilibrium rent. The
equilibrium rent is RM 250,000 per unit. A rent ceiling is set at RM 150,000 per unit. Then,
the equilibrium rent is in the illegal region. At the rent ceiling, the quantity of housing
demanded exceeds the quantity supplied (Qd > Qs). Thus, there is a shortage of housing.
 500,000 Consumer surplus Potential
450,000 loss from
housing
400,000
search
Rent (RM per unit)

350,000
300,000 Deadweight loss
250,000
200,000
150,000
100,000 Producer
50,000 surplus
0
500,000 1,000,000 1,500,000 2,000,000
Quantity (thousands of units)

supply demand rent ceiling

Diagram 4

Inefficiency of a Rent Ceiling

A rent ceiling set below the equilibrium rent leads to an inefficient underproduction of housing
services. The marginal social benefit from housing services exceeds its marginal social cost
(MSB > MSC) and a deadweight loss arises. Diagram 4 shows the inefficiency of a rent ceiling.
A rent ceiling decreases the quantity of housing supplied to less than the efficient quantity.
Then, a deadweight loss arises, producer surplus shrinks and consumer surplus shrinks. There
is a potential loss from increased search activity.
 500,000
450,000
400,000
Rent (RM per unit)

350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
500,000 1,000,000 1,500,000 2,000,000
Quantity (thousands of units)

supply demand rent ceiling

Diagram 5

Diagram 5 shows the effects of a rent ceiling that is set above the equilibrium rent. The
equilibrium rent is RM 250,000 per unit. When a rent ceiling is set at RM 350,000 per unit, the
equilibrium rent leads to an inefficient overproduction of housing services. The marginal social
benefit from housing services decreased its marginal social cost (MSB < MSC) and a
deadweight loss arises. Diagram 5 shows the inefficiency of a rent ceiling. At the rent ceiling,
the quantity of housing demanded is less than the quantity supplied (Qd < Qs). Thus, there is a
surplus of housing.

When a housing prices is rise, the quantity of housing supplied will be more than the
efficient quantity. Then, a deadweight loss arises, producer surplus shrinks and consumer
surplus shrinks. It is same as the inefficient underproduction but this will be more loss for the
developers or suppliers because they produce more units of house rather than the demand by
the consumers. This is because, the consumers will not buy at the higher price because of the
income factors. Therefore, the overproduction will occurred because of the lacking in
demanded.

Main Determinant Influencing Demand and Supply

Determinant of demand

In the housing market, consumers want to have a new home but the price was RM 500,000.
Consumers do not buy the housing main reason are their main incomes do not enough to buy
the house. Therefore income is one of the main factor affect the demand for housing market.
In this determinant, we hope customers income will increase so that the demand for the
housing will also increase.

To decide to buy a new home, assuming the consumers have sufficient income to pay the price
of new house. Another factors might affecting their decisions involve the method of paying for
this new home housing loans comes along with the interest charged by bank. Interest for
housing loan is kind of the price of a complement product which defined as different goods
that stay together with another one under the consideration. The examples such as gasoline
with automobile, SIM cards with mobile phone, bread with butter. The demand for a new house
is increase if the interest of housing loan is lower, while interest of housing loan increase will
cause the demand falls. In this determinant we identify that the price of complement product
increase, the demand for the housing will decrease.

There is another kind of relationship differ from complement that is substitutes product.
Substitutes are different goods that compete with one under the consideration. Examples like
Nike shoes and Adidas shoes are substitutes. From our study, one of the substitutions for
housing is apartments. The demand for housing affected by the rental price of apartments such
as the apartments rented for RM200 per month. So there is much more people would want to
live in apartment rather stay in normal house. Therefore the relationship of this determinant is
the price of the substitute of apartment increase, the demand for the normal house increase.

Another factor that obviously will affected consumer buying for a house is taste of preferences
that involve certain psychological reasons for like or dislike a particular product. We came out
a basic principle is the much more consumer like a product or service, the better is our demand
for it.

Other than that, we found that different kind of expectation will affect the demand of the
market. Here is some example, some people buying not just one home but three to four in the
same area. The main reason is the buyer expectation to the price will increase in the future. It
similar to people who buying stock or currency, they expect the prices of stock or the value of
stock increase in the future. They make decision to purchase a goods and services based on
their own expectation. So we have another principle here is if buyers expect the price will
increase in future, the demand will increase as well.

These are the other kind of expectations which will affect the demand of the products. If
consumer expects that the product will be limited edition in future, the demand will increase
today. For example, people expect the future will face the shortage of gasoline, so they will
rush to buy and keep in stock. Also, if people expecting that their income will be decrease, the
demand for housing will decrease as well. During economic downturn or recession, most
people are facing financial problem or lost their jobs, in this situation people will reduce buying
most product.

Last factor that will affect the demand of the market is the population of the market,
demographic. Example a product in the market sell for RM 1.00, A Company bought 100 units,
B Company bought 400 units, and the market demand is 500 units. If C Company becomes a
new buyer and wishes to buy 500 units the market demand will increase to 1,000 units.
Therefore, a market is control by buyer, if there is many buyers enter the housing market, there
will be must more market demand.

In summarize the demand for a house will increase if:

a) Income increase for normal goods, but decrease for inferior goods.

b) The price of complement decrease.

c) The price of substitution increase.

d) The consumer preference.

e) The expectation price to increase in future.

f) The expectation product will be unavailable in future.

g) The expectation consumer income to rise in the future.

h) There are more buyers enter into the market.

The opposite will lead the demand for housing to decrease.

Determinant of supply

In the supply market we consider the behavior of another part of the market sellers. In supply
market there is only one motivation which is maximizing their wealth. Profits are gets by
mathematical calculation, total revenues - total costs = profit.

Total revenue calculated as the price of the product (housing) X the quantity sold. If we sell
1,000 units product in RM 1.00 our total revenue will be RM 1,000. If we sell 1,000 units
product in RM 2.00 our revenue will be RM 2,000. In fact we will earn more RM 1,000 in RM
2.00 compare to RM 1.00. In conclusion price of the housing increase, the quantity supplied
also will increase.

First determinants are cost of production, a cost of a production increase will lead the profits
decrease, and the quantity of supply will decrease as well. It will lead the supply curve shirt to
the left. The costs include costs of labor, costs of resource, and costs of capital.

Second, when we consider demand the one of the determinant was population. There are same
in supply view, one of the determinants of supply is the total number of sellers available in the
market. When the numbers of seller increase, the supply will increase and will cause the supply
curve to shift to the right.

Third determinant is substitution in supply, a substitute product provided by the same seller. If
the prices of substitute housing increase, the supply of the housing will decrease and directly
cause the supply curve shift to the left.

Lastly, expectation is one of the determinants in supply as well. If seller expects the price
increase, the supply of housing also will decrease because they want to earn more, so they will
keep the housing and resell at higher price. This will cause the supply curve shift to the left.

The Price of Production Cost Affect the Price of Buildings

Diagram 6

One of the factors that will cause decrease in supply will be the increment in cost of production.
Diagram 5 shows that the supply of buildings from the developers had decreased by shifting
the supply curve inwards from S0 to S1 when the price of cement, sand, labor and transportation
increases. The quantity of the buildings developed was at Q0 when the price is at P0. But when
the supply curve had shifted to S1, to meet the equilibrium point at E1, the quantity of supply
had decreased from Q0 to Q1 which cause to price to increase from P0 to P1 to avoid any
shortage in the market. We could understand more that there is a relationship within the cost
of production and the quantity supply of buildings in the market that would cause the price of
buildings to be increased if the cost of production increases.

Ways to Help In Reducing the Price of Buildings Using Economic Theory

Imposed subsidies

Diagram 7

Diagram 6 shows the effect when government has imposed subsidy into the cost of production.
The subsidy encourages the developers or suppliers to develop more quantity of buildings when
the price of the production cost has reduced from P0 to P1. It is clearly shown above that the
supply curve had shifted outwards from S0 to S1 when the subsidy is imposed due to the
reduction of production cost. Shifting outward of supply curve means that the quantity of
buildings in the market has actually been increased from Q0 to Q1 when the subsidy is imposed.
 Diagram 8

The graph in Diagram 7 shows the shift of supply curve from S0 to S1 has caused the quantity
of supply to be increased from Q0 to Q1. Price of buildings will decreased from P0 to P1 when
there is more quantity of buildings in the market. From both of the graphs we could understand
that if government would give subsidies to the suppliers to reduce their burden in developing
the buildings, the quantity of buildings will be increased in the market that will cause the price
of buildings to be decreased.

Imposed price ceiling on cost of production

Diagram 9
Price ceiling is a maximum price of an item set by the government. It is always set below the
equilibrium point. The government would impose the price ceiling whenever they think that
the price at the equilibrium point (E) is too high. Therefore, the price of production cost
(materials, labor and transportation) is not allowed to rise above the price ceiling when it has
been imposed by the government by the supplier or any other person unless there is a change
by the government.

The suppliers will produce at Qs when price ceiling is imposed and while the demand
will be at Qd which cause shortage of materials, labor and transportation in the market. The
shortage may be replaced by importing it from overseas that sells at a cheaper price.

Diagram 10

Lesser cost in production will cause the supply curve to shift outwards from S0 to S1 as one of
the factors that affect the supply is the cost of production. Less in production cost would cause
the supply to increase from Q0 to Q1. Price of building would decrease from P0 to P1 when
the quantity of buildings developed increase in market.
Recommendations

Based on the demand and supply of housing market in Malaysia, I recommend housing
developers can plan for the housing market in future. Currently in Malaysias housing area is
supply more than demand. So, I hope those developer can slow down the process of developing
the housing market segment. By doing so, it will increase the buying power of consumer
because of the pricing and resale value in future. The advantage of this recommendation will
solve the issue of unsold housing area, overhang housing supply, and can also achieve the
equilibrium point, which is supply = demand.

The second recommendation is government is government sector play an important role in

control, managing the housing market in Malaysia. There are few ways to control prices of
housing:

1. Reduce estate taxes. The government should reduce estate taxes, thereby reducing
housing prices. In the real estate development process, consumers have to pay different
kinds of taxes, these payments are ultimately cause the housing prices would be
increased, besides government can be improving efficiency by reducing administrative
links, open procedures, announced tax rates allowing property rights, rules, municipal,
trade and other data, and other publicly available information, which not only can
greatly improve the way developers controllable development projects, reduce
transaction costs and reduce development costs, so as to provide a strong guarantee for
the reduced rates.

2. Build Low cost house. The government should set the appropriate quantity of low
medium cost housing to housing developers because this can ensure they to build more
low medium cost building, the incentive given to low cost housing such as tax relief,
lower land premium, faster approval. Examples, government Malaysia built one
Malaysia house which is low cost house for those people who has low income, so that
they afford to buy a house. Besides, government should adopt a rationing system.
Examples, a person is strictly control to purchase a low cost house with certain
conditions. Therefore, everyone has a fair chance to buy a low cost house even though
there is a limited supply. This can avoid high income tenants buy those houses for
investments or rent to others for earning extra income.
 3. Rent Control-impose price ceiling. Government can control the housing price with price
ceiling rules which is lower maximum price. Price ceilings which prevent prices from
exceeding a certain maximum. Therefore people able to afford purchase house, and
suppliers will not increase price simply. Unfortunately there has some effect of price
control. Examples, New York City of United States, often force upon to build more
affordable housing for low-income people. In short run, the house of supplying is
inelastic, since the quantity of apartments already supplied is fixed, and those that are
being constructed will continue to be constructed because of sunken costs. Over the
long-run however, rent control decreases the availability of buildings, since suppliers
cannot earn a high profit from construction therefore they do not wish to spend the
money to build more apartments. But yet they also do not maintain the quantity that
have, not only to save costs and do not have to worry about demand of market, since
rent controlled houses is excessive demand. Hence, excess demand and limited supply
leads to a large shortage.

4. Control number of immigrants Population is one of effective factors that causes housing
price increase. When population growth or increase of immigrants and demand of
housing increases. Demand is rising than willingness of suppliers to build. If supply of
housing fails to meet the growth of in the number of households, it will increase the
cost of housing. Therefore, government should be controlling strictly on foreigner labor
come into Malaysia illegally. Now, more and more foreigners are coming to here for
working without getting working visa but illegally. Government has to fine or jail them
to avoid more people to come here in future. If they feel our government policies are
not as strict as other country such as Japan, United Kingdom and so on therefore
Malaysia will become the first choice country to immigrate.

Conclusions

There are several main factors that affect the change of demand and supply in housing market.
For changes in demand, demographic is the main factor because population size is the core
demographic variable. The other factor is income, price of the housing, change in lifestyle,
Interest rates, financial deregulation and the availability of credit, different kind of expectation,
and population of market can also affect the consumer to buy the house and take into
consideration. For changes in supply, production costs, decrease in sellers, expectation of the
housing, technology advance used and government policies.

References

http://www.tradingeconomics.com/malaysia/housing-index

Global Property Guide (2016, Jan, 4). Retrieved from

http://www.globalpropertyguide.com/Asia/Malaysia

Valuation and Property Services Department (2015, September, 6). Retrieved from

http://www.globalpropertyguide.com/real-estate-house-prices/M#malaysia