ALTHOUGH global economies are badly affected by the Covid-19 pandemic, house prices have been surging due mainly to the low interest rates, government stimulus, savings accrued during lockdowns, shortage in housing supply, and the pent-up demand from potential homebuyers and investors. Looking ahead, global house prices tend to be further fuelled up by the rising construction costs, owning to the soaring commodity prices as well as the pandemic-driven logistic and supply chain issues. This certainly, has captured a great deal of concern over people’s housing affordability in view of the impaired household income.
However, one should realise that house price growth and house price surge are two different concepts. House price growth refers to the increase in fundamental value of a property as a result of the normal house price adjustment in a healthy housing market, whereas house price surge refers to house prices that are substantially higher than their fundamental value (or overpriced in short), which the increment could be caused by the imperfections in housing markets such as severe lags in supply and credit market frictions, or the overly optimistic expectations of future house price movements – leading to an overheated housing market that eventually contributing to the risk of housing bubble.
Speaking on the impact of rising material costs on house prices, any increase in the cost of doing business will be sure to cause a fundamental price increase to the product. Such a hard cost increment is considered healthy and should not be treated the same as house prices surge, which the increment cannot be justified. Should there be a rise in house prices due to the rise in building material costs – which is unlikely to be backed by speculation – there will be a ceiling for the developers to increase their product pricing. Hence, one should not be too pessimistic with the issue of housing affordability.
Most importantly, the pandemic-driven housing boom is uneven across the global housing markets (chart). In contrast to the US, Australia, and those European countries where house prices have been escalating since the pandemic outbreak, prices rise in Asian countries – except for South Korea – are less evident. In the case of Malaysia, house prices growth even slips into negative territory (-0.75%) in Q3’21, after a slight growth of 0.7% and 1% in Q1’21 and Q2’21, respectively.
Though there could be an increase in house prices in 2022 following the resumption of construction activities and regained momentum of project launching, if the market sentiment is down or still remains flattish due to the lingering issues like overhang, affordability, high household debts and tighter credit standards, the overall demand will still be affected hence gives little room for house price surge. On this basis, there should be no house price boom in the Malaysian housing market.
This article was contributed by MKH Bhd manager of product research and development Dr Foo Chee Hung.