Macroeconomic drivers of housing affordability in Malaysia

Abstract

Approximately 1.7 million households in Malaysia, constituting around 23.1 percent of the population, were without their own homes in 2019. If the situation is not controlled, it may jeopardize the future of Malaysians who need a place to call home. As a result, countries such as Malaysia must devise a strong policy to provide acceptable housing affordability. To develop the right policy, first, the government must grasp the level of housing affordability that people own. Currently, Malaysia uses the median multiple to measure the housing affordability index, but it is not a precise indicator. Therefore, the first objective of this research is to ascertain the right amount of affordability by adopting a simple and usable housing affordability index. The Housing Affordability Index is applicable and useful to ascertain the level of housing affordability among income earners in the top 20 percent, middle 40 percent, bottom 40 percent (T20, M40, B40), and various states of Malaysia. In Malaysia, there is a lot of effort put into providing affordable homes by the federal and state governments as well as the private sector. However, there is evidence suggesting fewer takers of affordable homes due to affordability issues. Therefore, the second objective of the research is to discover macroeconomic factors that could affect housing affordability in the long run and the short run. Thus, by knowing these factors, policymakers would be able to identify the right elements to focus on as they design policies to improve housing affordability, be it for the B40 group or an impoverished state in Malaysia. This study employs the Auto Regressive Distributed Lag – Error Correction Model (ARDL-ECM) model using quarterly data to describe the short and long-run effects of significant macroeconomic variables on home affordability in Malaysia. Additionally, the Nonlinear Auto Regressive Distributed Lag (NARDL) model is utilized to examine the potential asymmetric relationship between real Gross Domestic Product and the Housing Affordability Index. Data for this analysis were sourced from the National Property Information Centre, Bank Negara Malaysia, and the Department of Statistics, Malaysia. The estimated regression results revealed the existence of a valid long-term relationship between home affordability and key macroeconomic variables such as real Gross Domestic Product, consumer price index, consumer sentiment index, business confidence index, and exchange rate. Furthermore, with the exception of the exchange rate, all of these macroeconomic variables have a significant short-term impact on housing affordability. There is also evidence of a nonlinear link between real Gross Domestic Product and housing affordability in the long run. Considering these findings, policymakers are advised to leverage the Housing Affordability Index, particularly tailored for the B40 income group, to foster more effective housing affordability strategies in Malaysia. Importantly, this research represents a pioneering effort to provide quantitative estimates of macroeconomic drivers impacting Malaysian housing affordability over an extensive period, facilitated by the creation of the Housing Affordability Index.