Malaysia's great house price boom is over
Lalaine C. Delmendo | June 27, 2020
To combat this over-building, the government has introduced multiple measures to control speculation and discourage developers from over-building. Stamp duty was increased from 3% to 4% on properties worth above MYR 1 million (US$ 229,384). The government also introduced an additional 5% in real property gains tax (RPGT) on sales of properties owned from 6 years and beyond.
Partly as a result, Malaysia's house price index rose a minuscule 0.41% to Q3 2019, according to the Valuation and Property Services Department (JPPH). This is a sharp slowdown from an annual price growth of 8.3% from 2010 to 2018.
When adjusted for inflation, house prices actually fell 0.66% y-o-y in Q3 2019.On a quarterly basis, the house price index fell by 0.76% (-1.09% inflation-adjusted) in Q3 2019. The COVID-19 outbreak is making things even worse.
Malaysia's average house price stood at MYR 423,179 (US$ 97,070).
Performance by property type:
- Terraced house average prices rose slightly by 0.79% (fell 0.29% inflation-adjusted) to MYR 387,532 (US$88,894) during the year to Q3 2019.
- High-rise residential properties' average price increased 0.56% y-o-y (-0.52% inflation-adjusted) to MYR 341,660 (US$78,371).
- Detached house average prices were down slightly by 0.14% y-o-y (-1.21% inflation-adjusted) to MYR 660,760 (US$151,568).
- Semi-detached house average prices fell by 0.51% y-o-y (-1.57% inflation-adjusted) to MYR 658,241 (US$ 150,990).
Kuala Lumpur has Malaysia's most expensive housing, with an average price of MYR 763,935 (US$ 175,235), followed by Selangor, at MYR 486,604 (US$ 111,619); Sabah, at MYR 460,221 (US$ 105,567); and Sarawak, at MYR 455,169 (US$ 104,409).
The cheapest housing in Malaysia can be found in Melaka and Kelantan, with average prices of just less than MYR 200,000 (US$45,877).
The Malaysian economy expanded by 4.3% in 2019, notably lower than the expansions of 4.7% in 2018 and 5.9% growth in 2017, mainly due to a decline in output of crude oil, natural gas, and palm oil and a fall in exports due to the US-China trade tension.
The economy is widely expected to slow further this year. Bank Negara Malaysia (BNM) projects that the economy will see a contraction of 2% at its worst and growth of 0.5% as its best in 2020, due to the imposition of global and domestic measures to contain the COVID-19 pandemic.
Malaysia: gross rental yields have moderated, and are now 2.3% to 5.4%
Condominium prices in Kuala Lumpur are reasonable at between US$1,800 to US$2,000 per square metre (sq. m.)
A stable country, a stable market. The extraordinary stability of residential property prices in Malaysia - rising in some years by 2% or 3%, falling in other years by a few per cent - means that the observer is never shocked by a sudden boom or price-collapse. In inflation-adjusted terms, prices have been rather stable for the past 15 years.
Limits to capital appreciation. Given that Malaysia is a large place and relatively thinly populated, there are limits to capital appreciation prospects (arguably, except in ‘dormitory town’ areas neighbouring Singapore). Therefore, the prime attraction of property ownership in Kuala Lumpur is income.
Gross rental yields have however fallen significantly:
- Condominiums of 120 sq. m. have gross returns of 4.5%, but two years ago, our researchers found that rental yields averaged over 8% for this size.
- Bungalows have really low gross rental yields at around 2.5%, and again, have fallen significantly.
Conclusion: Malaysian property is less attractive as an investment than it has been for many years, given the falling rental yields.
Round trip transaction costs are very low in Malaysia. See our Malaysia transaction costs analysis Dubai transaction costs analysis and our Malaysian home buying costs compared with other countries in Asia.
Rental income tax is high in Malaysia
Rental Income: The net rental (and other) income of nonresidents is taxed at a flat rate of 26%, without any personal relief.
Capital Gains: For non-citizens and non-residents, real property gains tax (RPGT) is levied on disposals of properties held for more than five years at a flat rate of 5%. As of 2014, different RPGT rates apply for citizens, non-citizens, and companies.
Inheritance: No inheritance or gift taxes are levied in Malaysia.
Residents: Residents are taxed only on their Malaysian-sourced income at progressive rates, from 2% to 26%.
Buying costs are very low in Malaysia
Total round-trip costs are around 3.4% to 6.75% of the property value, inclusive of the estate agent's commission of 2.75% for the first MYR500,000 (US$135,135), and 2% thereafter. Roundtrip transaction costs in Malaysia are among the lowest in Asia.
Malaysia is pro-tenant in practice
Because Malaysia's court system is inefficient and slow, rental market practice is pro-tenant, even though the law is pro-landlord.
Rent: With the passage of the Control of Rent (Repeal) Act of 1997, rent control was abolished in 2000.
However although the law states that rents can be freely negotiated, rent increases can be appealed to the courts, if the tenant feels the increase is too high.
Tenant Security: At the end of the contract, the landlord has the right to vacant possession of the premises without payment of any compensation, though a notice to vacate must be given to the tenant three months before the expiration of the contract. Any rent adjustment must be mutually agreed upon. Tenancy agreements usually last for a year.
Recovering unpaid rent is difficult. The court system is inefficient and very costly compared to the amounts recovered.
Malaysia’s economy to slow sharply in 2020The Malaysian economy expanded by 4.3% in 2019 - the slowest growth in a decade, given that 2011 to 2019 the annual average growth rate was 5.1%. The slowdown was mainly attributed to a decline in output of crude oil, natural gas, and palm oil, and a fall in exports due to the US-China trade tension.
This year, the economy is widely expected to slow further. “Tourism-related sectors are expected to be affected by broad-based travel restrictions and travel risk aversion, while production disruptions in the global supply chain will weigh on the manufacturing sector and exports,” the BNM said.
In March 2020, Malaysia’s inflation was -0.2%, the first decline since February 2019, as fuel costs dropped in line with the plunge in global oil prices, according to the Department of Statistics Malaysia. Malaysia’s inflation in 2019 was 0.7%, down from 1% in 2018 and 3.8% in 2017.
In March 2020, the BNM’s Monetary Policy Committee (MPC) reduced its Overnight Policy Rate (OPR) to a decade-low of 2.5%, following a 25-basis point rate cut in January, to buoy the slowing economy. In addition, the statutory reserve requirement ratio for banks was also reduced by 100 basis points to provide additional liquidity into the banking system.
Unemployment was at 3.3% in February 2020, unchanged from a year earlier, based on the figures from the Department of Statistics Malaysia. However, this figure was still unaffected by the internal shock brought by the coronavirus outbreak and the jobless rate is expected to rise sharply beginning March 2020.
Malaysia’s budget deficit stood at 3.4% of GDP in 2019, following shortfalls equivalent to 3.7% of GDP in 2018 and 3% in 2017, according to the Ministry of Finance.
However, the shortfall is projected to increase sharply to around 4.5% to 5.6% of GDP this year, following the introduction of two stimulus packages in the first three months of 2020 in a bid to cushion the economic impact of the coronavirus pandemic. The combined value of the stimulus packages is MYR 250 billion (US$ 57.35 billion) – equivalent to 15.5% of the country’s GDP.
Likewise, government debt is expected to exceed the self-imposed limit of 55% of GDP in 2020, up from 52.5% in 2019, 51.8% in 2018, 50.7% in 2017, and 52.7% in 2016.
The Malaysian ringgit slides against the US dollar
The Malaysian ringgit (MYR) was one of Asia’s worst-performing currencies this year after it fell by as much as 10.7% in the past two years to reach a monthly average exchange rate of MYR 4.3542 = USD 1 in April 2020. The weakness of the domestic currency is mainly attributed to the slump in crude prices and concerns over the economic impact of the COVID-19 outbreak.
The domestic currency was also weighed down by political volatility after the surprise collapse of Mahathir Mohamad’s coalition, only two years after it overturned the United Malays National Organisation (UMNO), a party which has been in power for more than 60 years.
The decline partially offsets the almost 15% gain of the ringgit against the dollar from December 2016 to April 2018, mainly due to the country’s improved balance of payments.
Malaysia recorded a current account surplus of MYR 49.74 billion (US$ 11.38 billion) in 2019, the largest since 2012.