In June 2017, Bank Negara Malaysia (BNM) has published a detailed report on housing affordability issues nationwide, which warned that the number of unsold residential properties are at their highest level in a decade.
In its report, the BNM warned that Malaysia’s property market is facing an oversupply of non-affordable homes and idle commercial space, while the demand for affordable housing is not being met. This undersupply of affordable homes is likely to worsen going forward given current trends in income and demographic factors.
Residential market
In 1Q 2017, total unsold residential properties stood at 130,6903 units, the highest in a decade. This is close to double the historical average of 72,239 units per year between 2004 and 2016. About 83% of the total unsold units were in the above RM250,000 price category. 61% of total unsold units were high-rise properties, out of which 89% were priced above RM250,000. Johor has the largest share of unsold residential units (27% of total unsold properties in Malaysia), followed by Selangor (21%), Kuala Lumpur (14%) and Penang (8%).
According to BNM, the issue of affordable housing reflects mainly the supply-demand imbalances in Malaysia, which worsened during the 2012 - 2014 period. During these years, new housing supply fell short of the increase in demand (average supply of 85,000 new units versus the formation of 118,000 new households). This is in contrast to the period 2007 - 2009, when the new supply exceeded the demand for housing.
In addition, the effect of the supply shortfall on housing affordability was exacerbated by the slower increase in household incomes (12.4%) relative to house prices (17.6%). Both of these trends were more acute in key states.
Office Space
On the supply and demand of the office space, since 1Q 2015, the office vacancy rate in the Klang Valley has increased steadily from 20.9% to 23.6% in 1Q 2017. This is higher than the national average of 18.1%, and more than three times the regional average of 6.6%.
The incoming supply of 38 million square feet (msf) of office space could exacerbate the glut. The office vacancy rate is projected to reach an all-time high of 32% by 2021, far surpassing levels recorded during the Asian Financial Crisis. This means if current supply-demand dynamics persist, 1-in-3 offices in Klang Valley could be vacant in 2021. Total incoming supply could potentially be higher if future phases of the ongoing large development projects are taken into account. This may result in further downward pressure on office rentals, which are already the lowest in the region.
Shopping complexes
As for the shopping complexes, the total retail space in the major states has increased sharply over the years. In 2016, Penang had the highest retail space per capita in the country (10.5 sqft per person), followed by Klang Valley (8.2 sqft per person) and Johor (5.1 sqft per person). In higher-income regional cities such as Hong Kong SAR and Singapore, prime retail space per capita is only 3.6 and 1.5 sqft per person respectively.
The incoming supply of 140 new shopping complexes by 2021 across the Klang Valley, Penang and Johor is expected to worsen the oversupply going forward. While Penang currently has the highest prime retail space per capita, it will be overtaken by Johor by 2018. The large incoming supply of 15.8 million square feet of retail space in Johor will be 1.5 times the existing supply.
Severe property market imbalances can pose risks to macroeconomic and financial stability
According to BNM, imbalances in both the residential and commercial property markets in Malaysia poses a serious concern as the property sector has linkages to more than 120 industries, collectively accounting for 10% of GDP and employing 1.4 million Malaysians.
Malaysia’s own experience during the Asian Financial Crisis demonstrated that sharp corrections in the property market can have severe repercussions on the wider economy. In the years leading up to the Asian Financial Crisis, the Malaysian economy experienced a period of strong growth (1992-96: 9.6%). This fuelled exuberance in the property market, resulting in an increase in property prices and overdevelopment across the different property segments. This encouraged an increase in lending by banks to households for the purchase of properties and developers to fund the development of new projects. The ensuing construction frenzy also demanded large amounts of imports, which worsened the current account of the Balance of Payments. When the crisis struck and the property market crashed in 1998, projects were abandoned as developers’ debt-servicing capacity weakened. Banks suffered losses as non-performing loans to the property sector doubled, resulting in a credit crunch. Spillovers to other industries then resulted in widespread layoff s and a severe economic recession. A similar story unfolded in Spain, Ireland and the US during the Global Financial Crisis – in these cases, large fiscal stimulus and bailouts had also strained the governments’ balance sheets.
