In Malaysia, property prices have remained consistently high despite a decline in demand due to the effects of the COVID-19 pandemic. While a large number of homes sit unsold—around 35,000 in the first quarter of 2022—prices have yet to drop. This raises the question: why are property prices defying basic economic principles of supply and demand?
Rising Construction Costs
One of the primary reasons behind the sustained high prices is the escalating cost of construction materials. Steel, cement, timber, and other raw materials have seen a significant price increase. Datuk NK Tong, president of The Real Estate and Housing Developers’ Association Malaysia (REHDA), has stated that these rising costs are being passed on to buyers. As many as 63% of developers have responded to these rising material costs by increasing the prices of their properties, according to Datuk Tong in an interview with The Malaysian Reserve.
This surge in material costs is compounded by inflation, further driving up construction expenses. Property developers are left with little choice but to raise prices, passing these costs onto homebuyers.
Interest Rates Add Pressure
Inflation isn't the only economic factor affecting the housing market. Malaysia’s interest rates have also seen a significant increase. During the pandemic, the overnight policy rate (OPR)—which is the rate set by Bank Negara Malaysia (BNM)—dropped to a historic low of 1.75%. However, the OPR was raised to 3.00% in May 2023, making borrowing more expensive for both developers and homebuyers.
Higher interest rates mean more expensive loans, and these higher borrowing costs are reflected in property prices. Developers, facing higher financing costs, transfer these to the end consumer.
Infrastructure Development: A Double-Edged Sword
Another factor driving up property prices is the improvement in Malaysia's infrastructure. The expansion of transportation networks, particularly the Mass Rapid Transit (MRT) system, is making previously less accessible areas more attractive. Residential areas connected to business districts and educational institutions have become more desirable and, therefore, more expensive.
For example, the new MRT Putrajaya line in Klang Valley connects a variety of neighborhoods to key locations, increasing the value of properties near these stations. According to Ms. Amy Wong, Executive Director (Research & Consultancy) at Knight Frank Malaysia, this enhanced connectivity has made these areas more appealing for property investment.
Conclusion
While economic theory suggests that modest demand should lead to lower prices, Malaysia's real estate market continues to defy expectations. High construction costs, rising interest rates, and improved infrastructure have created an environment where property prices remain elevated despite a surplus of unsold homes.
For investors and developers, staying informed about these market dynamics is crucial. As Winston Lee, Director of Special Projects at PropertyGuru, points out, understanding the factors influencing property prices can help both buyers and developers make better decisions in this challenging market.
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