APPLYING HOUSING SUPPLY ELASTICITY ANALYSIS OF MALAYSIA MAJOR CITIES

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1 International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 11, November 2018, pp , Article ID: IJCIET_09_11_054 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed APPLYING HOUSING SUPPLY ELASTICITY ANALYSIS OF MALAYSIA MAJOR CITIES Noryanto Asroun Mohamad Asroun Faculty of Architecture, Planning & Surveying, Universiti Teknologi MARA, Perak Branch, Seri Iskandar Campus, Bandar Seri Iskandar, Perak, Malaysia Mohd Hasrol Haffiz bin Aliasak Faculty of Architecture, Planning & Surveying, Universiti Teknologi MARA, Perak Branch, Seri Iskandar Campus, Bandar Seri Iskandar, Perak, Malaysia Mohd Afandi bin Abu Bakar Faculty of Business and Management, Universiti Teknologi MARA, Perak Branch, Seri Iskandar Campus, Bandar Seri Iskandar, Perak, Malaysia ABSTRACT Issue of rapid house price increase in Malaysia had affected home ownership activities. Although the Government of Malaysia had initiated many programs to improve affordability of first time home buyers, but the efforts fail to curb the issue in the long term. Thus, this paper will explain the function of supply elasticity analysis to evaluate the rapid house price increase. The purpose of this paper is to illustrate the conceptual framework of supply elasticity analysis as a mechanism that explains the house price dynamism in Malaysia. The framework is developed based on qualitative research using past literature studies. This paper suggests that the government can use the supply elasticity analysis to evaluate the house price movement. The results are significant to the government in designing appropriate programs to improve affordability among first time home buyers. For future study it is necessary to conduct an empirical analysis to determine the house price supply elasticity coefficient to support the argument brought up from this study. Keywords: House Price Dynamics, Supply Elasticity, Supply and Demand Cite this Article: Noryanto Asroun Mohamad Asroun, Mohd Hasrol Haffiz bin Aliasak and Mohd Afandi bin Abu Bakar, Applying Housing Supply Elasticity Analysis of Malaysia Major Cities. International Journal of Civil Engineering and Technology, 9(11), 2018, pp editor@iaeme.com

2 Applying Housing Supply Elasticity Analysis of Malaysia Major Cities 1. INTRODUCTION The housing sector is an important contributor to the economic growth and development. This sector is always spelled out as a national economic indicator by way of construction output, house price index and GDP of construction data. It can influence the business cycle and performance of financial system of the country. In Malaysia, major cities like Kuala Lumpur is facing a rapid and high real estate property price increased, particularly the housing sector. The rapid and high increased of house prices has affected the affordability of younger households or first time home buyers. The first time home buyers can only buy high density flat in Kuala Lumpur (Mentaza Khan, Mahamud, & Kamaruddin, 2012). The other choice for them is to live further away from the city, but they need to bear higher transportation cost to and from the city. The issue of rapid house price increase is related to the shortage of the affordable housing stocks that priced up to RM165,000. There were only 21% of new housing launched in 2014 were priced below RM250,000 (REHDA Institute, 2015). This situation shows that only a small portion of home buyers can buy the houses. Hence, the remaining will miss the opportunity to own a house when the affordable houses are sold out and the remaining houses offered to them are beyond their affordability. This issue has become more crucial when the government has no power to control the house price of new housing projects by private developers as well as house price on the secondary market. In response to the issue, the Government of Malaysia has embarked various strategies and programs to improve the affordability of the first time home buyers. However, the efforts only manage to solve the short-term problems and fail to curb the issue for the long term. My First Home Scheme is one of the strategies. Under this scheme the first time home buyers can get financing to purchase their house up to RM400,000 which is matched with house prices in Kuala Lumpur. Although this strategy can work but some home buyers still feel that high repayment cost may burden them henceforth they refuse to buy the house. The current strategies taken by the government seem not effective to improve the affordability among home buyers (Kamal, Hassan, Osmadi, & Fatah, 2015). This problem happens due to adhoc and inappropriate program were applied. For example, by giving a higher amount of financing to the home buyers may increase the demand of the high priced house. If the demand is on an inelastic supply curve, a small increase of the house demand will effect to the huge increase of the house price. Besides, the government has no means to satisfy the demand for houses of low price when the price is determined by the market mechanism except for the low-cost and low-medium cost housing projects. It is impossible the developers will produce more affordable housing project, except if the government can influence the supply factors within the market mechanism. Therefore, it would be of great interest of this paper to explain the function of supply elasticity analysis to evaluate the house price movement. The purpose of this paper is to develop a conceptual framework of supply elasticity analysis as a mechanism to evaluate the house price movement in Malaysia editor@iaeme.com

3 Noryanto Asroun Mohamad Asroun, Mohd Hasrol Haffiz bin Aliasak and Mohd Afandi bin Abu Bakar 2. LITERATURE REVIEW 2.1. House Price Dynamics In the last decade, Malaysian economics have grown fast and this has encouraged strong demand towards housing in major cities in Malaysia. High demand of housing had contributed to significant increase in house prices. Malaysia House Price Index (MHPI) averaged at 4.13 percent from 1997 until 2018, with a maximum increase of 44.5 percent in the first quarter of year 2000 and maximum decrease of 39.2 percent in the third quarter of MHPI for Kuala Lumpur averaged at 7.1 percent from year 1990 until Median house price in Kuala Lumpur city in 2016 was at RM620,000 which is higher than Petaling (RM523,000), Johor Bahru (RM384,000) and Georgetown (RM600,000). However, the maximum affordable house price in Kuala Lumpur city is much lower at RM454,000 based on Housing Cost Burden (HCB) approach (Bank Negara Malaysia, 2018). The above data shows that house price in Kuala Lumpur city increase rapidly every year and there is a large gap between house price and the affordability of the first time home buyers. The above situation is related to house price dynamics. House price dynamics are changed or movement in house price during an economic boom and bust, which could give effect to the household and the economy at large (Granziera & Kozicki, 2015). Movement of house price is significantly related to supply and demand of housing in the market. Large fluctuation in house price could cause problems in the housing market. When house prices increased rapidly it creates a critical issue of housing affordability among home buyers. The rapid increase in house price can turn to decline in the house price and resulted capital losses to the households (Reen & Razali, 2016). Determinants of demand among others include the household disposable income, shift in demographic, tax system and interest rate. While supply determinants include the availability and cost of land and the construction and investment cost. There is a significant heterogeneity in the house price dynamics across different geographical location (Galati & Teppa, 2017; Tsatsaronis & Zhu, 2004). An empirical study on demand factors found that inflation is the main driver in house price dynamics followed by bank credit, short term interest rate and term spread (Tsatsaronis & Zhu, 2004) Market Mechanism Market mechanism describes how firms and consumers determine the price of goods and then determines how resources are allocated (Manser, 1994). In market mechanism, price is the invisible hand that guides market decisions. Firms usually set a price to respond to how many goods are being purchased and consumers on the other hand, react to that price. Changes in price signal shortage and gluts, giving the firms information about the availability of the goods and the extent of demand for them. In a perfect market the price will tend towards the equilibrium where the supply and demand curves intersect (see Fig. 1). Fig. 1 shows, if a higher price offered at 200, it attracts more supply but discourages consumers. A surplus stock of goods produced, so to get rid of its firms must cut the price until reach equilibrium price of 180. The firms or consumers can change their plan towards supply (or demand) by shifting supply (or demand) curve. For example, decrease in demand of brick from D to D 1 because a fall in income, it editor@iaeme.com

4 Applying Housing Supply Elasticity Analysis of Malaysia Major Cities may results excess supply until the firms adjust their price and quantity to meet a new equilibrium. Figure 1 Equilibrium price and quantity (Manser, 1994) 2.3. Supply Elasticity Analysis The interaction between supply and demand of housing should be viewed in supply elasticity aspect. The supply elasticity measures the responsiveness of housing supply to market shocks and this has many real economic consequences. Supply elasticity measures the responsiveness of quantity supplied to its price in relative terms at a given period, ceteris paribus (Fortune et al., 2008). It measures the responsiveness of quantity supplied due to a rate change in the price of a product and services. Supply elasticity is analysed using the formula: An inelastic supply is when a percentage change in the price is larger than the percentage change of quantity supplied (elasticity coefficient is less than 1). An elastic supply is when the percentage change in price will lead to a larger percentage change in quantity supplied (elasticity coefficient is greater than 1). A unitary supply is when a percentage change in price is equals to the percentage change in the quantity supplied (elasticity coefficient is equal to 1). Perfectly elastic supply is when almost zero percentage change in price brings about a very large percentage change in quantity supplied (elasticity coefficient is infinity). Perfectly inelastic supply is when a percentage change in price has no effect on the percentage change in the quantity supplied (elasticity coefficient is equal to 0). Harvey & Jowsey (2004); Manser (1994) differentiates between the supply elasticity and demand elasticity with the factor of time taken to adjust to a new price level. In momentary period, no adjustment of supply is possible and the supply is fixed (S 1 ) while in the short term, supply can be altered by engaging more variable factors (S 2 ) with inelastic supply. However, in the long term the supply will be elastic when the firms have new capacity and expanded to increase the output (S 3 ) (see Figure 2). Thus, in the long term, if the demand increases from D to D 1 the percentage editor@iaeme.com

5 Noryanto Asroun Mohamad Asroun, Mohd Hasrol Haffiz bin Aliasak and Mohd Afandi bin Abu Bakar change of price is smaller than the percentage change of quantity supplied, but in the short term the rate of price change is larger than the rate of quantity change. Figure 2 Supply elasticity over time (Manser, 1994) 2.4. Previous Studies of Housing Supply Elasticity Previous studies in various countries around the globe show mixed results of housing supply elasticity coefficient that influences the house price movement. Table 1 provides some of the recent studies that conducted using the time series data of minimum of 10 years and maximum of 36 years at national, district or city levels. There are three types of theoretical models applied in housing supply elasticity analysis with different econometric data analysis techniques (Wang, Chan, & Xu, 2012). The first theoretical model is based on the Tobin s q theory, which postulates the level of housing investment is a positive function of the ratio of housing prices to construction costs based on studies by Green, Malpezzi, & Mayo (2005); Vermeulen & Rouwendal (2007) and the model applying reduced form equations with price and cost shifters. The second theoretical model is based on the stock-flow adjustment theory whereby a stock adjustment process equilibrates housing demand and supply that also examined in reduced form equation by Goodman & Thibodeau (2008); Malpezzi & Mayo (1997); S. Mayo & Sheppard (1996) that widely used in international comparative studies. The third model is a structural model based mainly on urban spatial theory and visibly accounts for land as an input of housing supply estimation has been applied by Mayer & Somerville (2000); Saiz (2010). Most of the recent empirical studies were carried out in industrialised countries with different degree of elasticity across countries. Supply elasticity of housing in China was 2 (Gu, Michael, & Cheng, 2015), Finland was between 0.2 and 0.8 (Oikarinen, Peltola, & Valtonen, 2015) and US was between 0.45 and The studies in the US and China had dominated the list of studies with continuous studies among each other (Goodman & Thibodeau, 2008; Gu et al., 2015; Ihlanfeldt & Mayock, 2014; Wang et al., 2012). A study in the US by Goodman & Thibodeau (2008) supports the theory where supply is inelastic in the short term, meaning that percentage price change is larger than percentage quantity change. However, studies in China by Gu et al. (2015); Wang et al. (2012) prove the short term supply is elastic which is against the theory. High developable land ratio in the China cities (Gu et al., editor@iaeme.com

6 Applying Housing Supply Elasticity Analysis of Malaysia Major Cities 2015; Wang et al., 2012) had support housing supply in China. In long term supply, some studies proved that inelastic supplies exist. Studies in the Netherlands, UK and Finland (Meen, 2005; Oikarinen et al., 2015; Vermeulen & Rouwendal, 2007) show analysis for a long term of 36 years, 30 years and 25 years housing supply respectively are inelastic that affect the house price increase rapidly because of highly restrictive regulation applied in the countries. Generally, housing supply in China is somewhat in line with US but more elastic than the countries with highly restrictive regulation (Wang et al., 2012). Table 1 Summary of housing supply elasticity coefficient estimation of selected studies Countries Period Data Supply elasticity estimates Category China districts in Shanghai 2 Elastic 35 Chinese cities Elastic Kunming Elastic Shanghai 1.52 Elastic Chengdu 4.36 Elastic China Tianjin 5.10 Elastic Nanning Elastic Guangzhou Elastic Zhengzhou Elastic Yinchuan Elastic Xining Elastic 15 Finnish cities Inelastic Helsinki Inelastic Finland Espoo Inelastic Turku Inelastic Oulu Inelastic Rovaniemi Inelastic 63 Florida counties Mixed finding Dade, Broward and Palm Beach Mixed finding in South US Florida Hillsborough and Orange (Central) and Duval Elastic (North) Florida 133 US metropolitan 0.35 (mean) Inelastic areas Source Gu et al. (2015) Wang et al. (2012) Oikarinen et al. (2015) Ihlanfeldt & Mayock (2014) Goodman & Thibodeau (2008) editor@iaeme.com

7 Noryanto Asroun Mohamad Asroun, Mohd Hasrol Haffiz bin Aliasak and Mohd Afandi bin Abu Bakar US Las Vegas Elastic Austin Elastic Buffalo Elastic Dallas Inelastic Chicago Inelastic Los Angeles Inelastic Jacksonville FL Inelastic Indianapolis Inelastic San Francisco Inelastic New Orleans Inelastic Miami Inelastic 45 cities Mixed finding Dallas 29.9 Elastic Atlanta 21.6 Elastic Indianapolis 11.0 Elastic Los Angeles 3.73 Elastic Chicago 2.48 Elastic San Francisco 0.14 Inelastic New Orleans 0.06 Inelastic Miami Inelastic Netherlands National Close to 0 Inelastic UK 1973Q3 2002Q4 Regional Inelastic North 0.60 Inelastic North West 0.38 Inelastic Yorkshire & Humberside 0.00 Inelastic East Midlands 0.46 Inelastic West Midlands 0.28 Inelastic East Anglia 0.50 Inelastic South East 0.19 Inelastic Greater London 0.84 Inelastic South West 0.54 Inelastic Malaysia National Inelastic Malaysia National Mix finding Source: Researcher (2018) Green et al. (2005) Vermeulen & Rouwendal (2007) Meen (2005) S. K. Mayo & Malpezzi (1997) S. Mayo & Sheppard (1996) editor@iaeme.com

8 Applying Housing Supply Elasticity Analysis of Malaysia Major Cities 3. CONCEPTUAL FRAMEWORK OF HOUSING SUPPLY ELASTICITY ANALYSIS To our knowledge, empirical works with the intention of focusing on the housing supply elasticity of Malaysia major cities as considered in this study are very scarce. This study manages to discover only 2 previous studies that examine on the housing supply elasticity in Malaysia, which is more than 20 years ago, those were carried out by S. Mayo & Sheppard (1996) and by S. K. Mayo & Malpezzi (1997). Both studies compare housing supply elasticity of Malaysia with Thailand and Korea that confirm the government regulation affects the supply elasticity. However, the data used was limited to national data and the study area is not segregated into different location or geographical area. A study by Samad et al. (2016) reviews supply and demand policy schemes adopted by many countries as the paths to solve the affordability issue in Malaysia but the study is still at preliminary stage without empirical analysis. A new study should be carried out to make sure gaps in the previous studies are filled up and to meet new findings using a new set of data. The supply and demand of housing changed from time to time and eventually will influence the house price and the affordability of house buyers. Although at the moment the government has no intention to control the house price, but it can evaluate and monitor the price for policy making and implementation purposes. Applying the supply elasticity analysis in house price evaluation is necessary to make sure a systematic and justified policy can be made. An inelastic supply condition may have an extreme effect on the house buyer affordability when the house price increases. Thus, when the supply is inelastic the government should implement necessary policies to influence the supply factors in order to reduce the house price pressure to house buyer. A framework for housing supply elasticity of Malaysia major cities is designed to relate the supply elasticity analysis with the house price movement, despite the house price is determined by supply and demand factors (see Figure 3). The role of supply elasticity analysis is to evaluate the short term and long term house price movement. The result of the supply elasticity analysis will be either elastic or inelastic, which give a signal to the government on the policy and action to be implemented. If the housing supply is inelastic, it is vital for the government to further examine the significant supply factors under its control that contribute to the inelastic supply such as rules and regulation, tax, subsidy, incentives and banking practices. With analysing these factors the government can thereafter adjust the supply factors to reduce the pressure of house price dynamism onto the house buyer affordability. Hypothetically the housing supply elasticity of the Malaysia major cities is expected to be inelastic for the reason of the scarcity of land for residential area, population size and duration of constructing the houses. Consequently, the inelastic housing supply is expected to be the reason of high house price movement of major cities in Malaysia editor@iaeme.com

9 Noryanto Asroun Mohamad Asroun, Mohd Hasrol Haffiz bin Aliasak and Mohd Afandi bin Abu Bakar Figure 3 Conceptual framework of supply elasticity analysis of housing in Malaysia major cities Source: Researcher (2018) 4. CONCLUSION This concept paper explained the impact of supply elasticity of the house price movement. This paper begins with the issue of house price dynamics in major cities of Malaysia where the strategies taken were ineffective in the long term. Most importantly, this paper had identified the price evaluation process using supply elasticity analysis that illustrated through a proposed conceptual framework. The proposed conceptual framework could be used to implement house price evaluation and management in Malaysia. However, further studies of empirical evidence are needed to justify the conceptual framework. ACKNOWLEDGEMENTS This study is funded through a research grant of Perak Special Grants for Supervisory Incentives (Geran Khas Insentif Penyeliaan Perak) under UiTM Perak Branch; 900- KPK(PJI/GKIPP/01(0025/2018) entitled House Price Dynamics of Housing in Klang Valley, Malaysia: A Supply Elasticity Analysis. REFERENCES [1] Bank Negara Malaysia. Housing Watch. Retrieved October 3, 2018, from (2018). [2] Fortune, C. C., Anthony, J., Moohan, J., Fortune, C. C., Anthony, J., & Moohan, J. International variations in new housing supply International variations in new housing supply. International Journal of Housing Markets and Analysis, 1(4), (2008): [3] Galati, G., & Teppa, F. Galati, G., & Teppa, F. Heterogeneity in house price dynamics (2017). [4] Goodman, A. C., & Thibodeau, T. G. Where are the speculative bubbles in US housing markets?. Journal of Housing Economics, 17(2), (2008): [5] Granziera, E., & Kozicki, S. House price dynamics: Fundamentals and expectations. Journal of Economic Dynamics & Control, 60, (2015): [6] Green, R. K., Malpezzi, S., & Mayo, S. K. Metropolitan-specific estimates of the price elasticity of supply of housing, and their sources. American Economic Review, 95(2), (2005): editor@iaeme.com

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