Navigating Malaysia’s real estate maze in the age of rising rates

Rising interest rates and housing affordability concerns weigh on Malaysia’s property market amidst a weaker growth outlook

Malaysia’s ascension to developed-nation status seemed surer than ever in 2022. The economy, predicted to become a high-income one by 2028, grew 8.7 percent year-on-year, a rate of expansion not seen since 2000.

The impressive rate of recovery was felt in the residential market, with the National Property Information Centre (NAPIC) recording 243,190 transactions worth MYR94.27 billion (USD20.3 billion), an annual increase of 22.3 percent. The long-maligned residential overhang also fell below 30,000 units for the first time in two years.

But this year marks the comedown from a post-pandemic high. By faults not entirely of Malaysia’s own—weak global growth, high risk aversion in financial markets, and geopolitical tensions, among others—economic expansion is expected to moderate to anywhere from four to five percent in 2023.

“The residential prices are likely to move sideways as the price gap widens,” says Dr. Nai Jia Lee, head of real estate intelligence at property technology company PropertyGuru Group. “We are likely to see the transaction volume decreasing in response to uncertainty. Property seekers are likely to adopt a ‘wait-and-see’ attitude.”

Leading property marketplace PropertyGuru Malaysia saw its Sale Demand Index falling by 5.6 percent quarter-on-quarter in the first three months of 2023. It was the third consecutive quarter of declines as buyers resisted high asking prices.

Developers and sellers, under pressure themselves from increased costs of living and construction, are not budging. Asking prices on the site in fact rose 1.6 percent quarter-on-quarter, marking the fifth quarter of increases in a row. As sellers held fast to their prices, the number of available listings online decreased by 0.6 percent.

“The biggest challenge faced by property seekers is the rising interest rate, which raises the costs of home purchase. This is especially so, given that asking prices remain high,” says Lee. “The other challenge is the uncertain economic outlook.”

Bank Negara Malaysia increased in May the Overnight Policy Rate (OPR) by 25 basis points to three percent. The rate hike, the latest in a series of tightening measures since May 2022, marks the end of an era.

We are likely to see the transaction volume decreasing in response to uncertainty. Property seekers are likely to adopt a ‘wait-and-see’ attitude

At the height of the pandemic in 2020, the benchmark interest rate crashed to 1.75 percent, the lowest in history. Then war in Europe began, succeeded by the reopening of the Malaysian economy, pricking pent-up demand. By the third quarter of 2022, headline inflation hit 4.5 percent, and home buyers saw their purchasing power greatly diminished.

The central bank’s Monetary Policy Committee justifies the latest hike as core inflation hovers at elevated levels.

“It is important to bear in mind that the OPR did not go below three percent for as long as about nine years, from 2011 to 2019,” says Tan Hui Yin, partner with Tan Chap & Associates. “Taking into consideration that the highest OPR increase on record is 3.5 percent, it seems like the current rate may not be the lowest. But it would still be considerably decent for those who wish to purchase a house at the moment.”

The Bottom 40 percent (B40) and the Middle 40 percent (M40) income groups are expected to absorb the shock first. “The increase in OPR will take a cut from their monthly disposable income,” Tan says. “It is inevitable that the increase may result in a slower growth in the property market in the short run.”

The B40 group, whose monthly household incomes are less than MYR4,850, comprised 2.91 million households before the pandemic. In 2020, 20 percent of households from the higher-income M40 group regressed to B40 while 12.8 percent of Top 20 percent (T20) households, the most affluent segment of society, joined the M40 group, according to early official estimates.

“An oversupply of properties in the highend segment and a shortage of affordable properties seem to be a reflection of the distribution of income groups in Malaysia,” says Tan. “Collective effort is required to overcome the overhang. It is unlikely that there will be a single policy that is capable of overcoming this long overdue issue in our country.”

Upmarket properties or those priced above MYR1 million only accounted for 13.6 percent of the overhang in 2022, according to NAPIC. At MYR7.5 billion, however, these units represented around 40.7 percent of the total overhang value.

The overhang in 2022 was worth MYR18.4 billion, equivalent to 27,746 units.

“Malaysia’s real estate market is facing a conundrum,” says Lee. “On the one hand, housing affordability is a problem amid higher cost of living and prices. On the other hand, there is an oversupply of private homes. The conundrum, interestingly, links back to traffic congestion.”

Policies to reduce congestion—integrating developments with transit systems, that is—will be key to resolving the conundrum, he adds. “Providing high-quality housing for low-income earners, near employment clusters or nodes that offer reliable public transport, will be key.”

Strong labour market conditions, highlighted by the decline of the unemployment rate to 3.5 percent this year so far, have propped up domestic demand since the economy reopened. “While the downside risks are visible at the global level, Malaysia is expected to continue to experience positive economic growth due to improvements in domestic consumption and higher tourism arrivals,” says Lee.

The loosening of China’s borders is especially crucial to Malaysia as its manufacturing competitiveness develops. Mainland China remains Malaysia’s largest export market and a top source market for tourists.

Exports of electrical and electronic products from Malaysia soared by 30 percent in 2022, according to research by financial services firm S&P Global. Multinationals such as Intel and Infineon Technologies are completing giant industrial developments in the peninsula by 2024.

“The industrial real estate segment still has a lot of potential and provides a lot of opportunities in light of the digitalisation and transformation of Industry 4.0,” says Tan. “However, we must also bear in mind the possible market uncertainties stemming from geopolitical tensions when assessing risks of investments.”

Job creation for the rakyat is one thing for politicians, housing another. Under the 12th Malaysia Plan, the government is committed to building 500,000 affordable housing units by 2025.

To achieve this, the National Housing Policy is being reviewed to comply with Prime Minister Anwar Ibrahim’s new-fangled slogan Malaysia Madani. The Local Government Development Ministry also recently announced that it would study Singapore’s renowned public housing policies for possible implementation in Malaysia.

Drafted in 2018, the National Housing Policy seeks to promote affordable housing and address chronic issues varying from subpar construction to abandoned residential projects. The latter is, as Datuk Chang Kim Loong, honorary secretary-general of the National House Buyers Association would call it, “a thorn in the housing industry.”

With its action plan due for final implementation in 2025, the housing policy is lagging across several important yardsticks. “The proper implementation of the National Housing Policy is vital to the property market,” says Tan. “But it has not been adhered to due to various reasons.”

Housing for all is one of the last hurdles that Malaysia must clear before it can join the big leagues. If favourable economic trends hold, Malaysia could be well on its way to becoming a high-income economy, its GDP per capita jumping to USD18,600 by 2030.

“Malaysia has all the necessary attributes to successfully make this leap,” says Victoria Kwakwa, vice-president for East Asia and Pacific at The World Bank, in a statement. “But navigating the next stage of development will require bold measures and tough reforms.”

The original version of this article appeared in PropertyGuru Property Report Magazine Issue No. 179 on issuu and Magzter. Write to our editors at [email protected].