Strong demand offset by oversupply
Lalaine C. Delmendo | March 27, 2022
Malaysia's house prices remained more or less steady, as the positive impact of strong demand is being offset by massive oversupply. During the year to Q3 2022, the nationwide house price index rose by a meager 0.72%, a slowdown from y-o-y increases of 2.62% in Q2 and 2.4% in Q1, based on figures released by the Valuation and Property Services Department (JPPH). Though when adjusted for inflation, house prices actually dropped 3.6%, its worst showing in recent history.On a quarterly basis, the house price index fell by 2.11% (-2.79% inflation-adjusted) in Q3 2022.
Malaysia's average house price stood at MYR 438,967 (US$103,076) over the same period.
By property type:
- Terraced house average prices rose by 1.34% y-o-y to MYR 418,592 (US$98,291) in Q3 2022. Quarter-on-quarter, prices fell by 2.17%.
- High-rise residential properties' average price rose slightly by 0.78% y-o-y to MYR 342,506 (US$80,425) in Q3 2022. On a quarterly basis, prices dropped 1.54%.
- Detached house average prices were down by 3.01% y-o-y to MYR 617,432 (US$144,981) over the same period. Quarter-on-quarter, detached house prices fell by 1.68%.
- Semi-detached house average prices rose slightly by 1.16% y-o-y but dropped 2.93% q-o-q to MYR 669,402 (US$157,185) in Q3 2022.
Demand is robust. In Q3 2022, the total number of residential property transactions reached 64,989 units, up by 11.2% from the previous quarter and by a whopping 52.5% compared to the same period last year, according to the JPPH. Likewise, residential transaction value increased 10.4% q-o-q and by 40.4% y-o-y to MYR 25 billion (US$5.8 billion).
Though there remains a vast amount of unsold housing stock. In Q3 2022, residential overhang totalled 29,534 units worth MYR 19.95 billion (US$4.61 billion). Johor accounted for the biggest overhang, at 5,348 units, followed by Penang (with 5,222 units) and Klang Valley (with 4,386 units).
“Perhaps it is time to reduce new supply in the states of Johor and Penang to address this overhang in the years to come. More study and better assessment matrix need to be in place to determine actual demand before new supply enters the market,” said Chan Ai Cheng, president of MIEA.
Despite massive oversupply, residential construction activity remains high. During the first three quarters of 2022, the total number of housing starts for landed and high-rise residential buildings rose by 4.2% y-o-y to 72,993 units, while completions increased slightly by 0.5% y-o-y to 51,558 units in Q1-Q3 2022.
Malaysia's housing market is expected to be buoyed by the government's recent announcement of subsidies and incentives totaling MYR 55 billion (US$12.71 billion), in an effort to address worsening housing affordability. According to Sheldon Fernandez, country manager for PropertyGuru Malaysia, the programme will give first-time homebuyers up to 75% stamp duty discount on properties valued at MYR 500,000 (US$116,300) to MYR1 million (US$232,600) through the end of 2023.
"This will hopefully encourage homeownership among first-time homebuyers and further spur the property market,” said Fernandez.
The Malaysian economy expanded strongly by more than 7% during 2022, following a 3.1% growth in 2021 and a 5.5% contraction in 2020. It was the country's best economic performance in more than a decade. The economy had grown by a healthy annual average of 5.3% from 2010 to 2019.
However, economic growth is projected to moderate this year, as global economic outlook remains gloomy and geopolitical conflict suppresses growth. The Finance Ministry forecasts a real GDP growth rate of between 4% and 5% this year, in line with the recent projections released by the International Monetary Fund (IMF) and World Bank.
Analysis
of Malaysia Residential Property Market »
Reasonable property prices in Malaysia; gross rental yields are now 2.62% to 6.52%
Gross rental yields from apartments in Malaysia remain moderate. The Gross Rental yield is the rent the landlord will earn - before taxation, vacancy costs, and other costs - compared to the property's purchase price. While Malaysian property is often not particularly attractive in terms of return on investment, a stable country is a stable market. Residential property prices in Malaysia showed a notable growth over the past 20 years.
We may say that condominium prices in Kuala Lumpur range from USD 150,000 to USD 1,400,000 and rents range from around USD 300 to USD 2,000 per month. In Kuala Lumpur City Centre (KLCC), it would not be unusual for property prices here to be USD 299,936 (1-bedroom), USD 392,269 (2-bedroom) and USD 653,695 (3-bedroom), with rents of USD 854 (1-bedroom), USD 1,077 (2-bedroom) and USD 1,745 (3-bedroom). Earning a rental yield of around 3%.
In Ampang, another area popular with expats, one might find prices of USD 158,096 (1-bedroom), USD 213,559 (2-bedroom) and USD 183,056 (3-bedroom), with rents from USD 476 (1-bedroom), USD 640 (2-bedroom) and USD 855 (3-bedroom). Earning rental yields of around 3% to 5%.
Another popular choice for expats is the Damansara Heights, only 17 minutes by LRT/MRT or 30 minutes by bus away from KLCC - a residential suburb where mostly wealthy locals reside. Apartment and condominium prices in this area might cost USD 309,135 (1-bedroom), USD 393,332 (2-bedroom) and USD 567,273 (3-bedroom), with rents of USD 846 (1-bedroom), USD 1,035 (2-bedroom) and USD 1,692 (3-bedroom). Earning a rental yield of around 3%. Property is much pricier here than in KLCC and Ampang.
Bangsar is another expat-friendly neighborhood and apartment and condominium prices in this area might be USD 203,268 (1-bedroom), USD 254,378 (2-bedroom) and USD 348,717 (3-bedroom), with rents from USD 671 (1-bedroom), USD 882 (2-bedroom) and USD 1,217 (3-bedroom), earning a rental yield of around 3% to 4%.
The return is significantly better for larger apartments at around 4% to 6% than for small apartments at about 3%.
Round trip transaction costs are very low for foreigners buying residential property in Malaysia. See our Residential transaction cost analysis for Malaysia.
Rental income tax is high in Malaysia
Rental Income: The net rental (and other) income of nonresidents is taxed at a flat rate of 24%, 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.
Strong economic growth, but outlook clouded
The Malaysian economy was estimated to have expanded by more than 7% during 2022, following a 3.1% growth in 2021 and a 5.5% contraction in 2020. It was the country’s best economic performance in more than a decade.“[2022]'s economic performance is encouraging as a result of the reopening of the economy in line with a shift to a COVID-19 endemic phase,” said newly-sworn in prime minister Anwar Ibrahim.
The economy had grown by a healthy annual average of 5.3% from 2010 to 2019.
However, economic growth is projected to moderate this year, as global economic outlook remains gloomy and geopolitical conflict suppresses growth. The Finance Ministry forecasts a real GDP growth rate of between 4% and 5% this year, in line with the recent projections released by the International Monetary Fund (IMF) and World Bank.
“The government will do its best to strengthen economic indicators, restore investor confidence and rebuild a prosperous Malaysia,” Anwar added.
Labour market conditions are improving again. In November 2022, the unemployment rate stood at 3.6%, an improvement from 4.3% in the same period in the prior year, thanks to improved economic activity, according to figures released by the Department of Statistics Malaysia. The country’s jobless rate averaged 3.2% annually in 2009-19 before increasing to 4.5% in 2020 and 4.7% in 2021, mainly due to the Covid-19 pandemic.
The number of unemployed people fell by 1,100 people from the previous month, to 600,900 people in November 2022. Employment persistently increased since August 2021, with the number of employed rising by 27,100 people month-on-month to 16.11 million people in November 2022.
Inflation stood at 3.8% in December 2022, down from 4% in the previous month but still higher than the 3.2% seen a year ago, according to the Department of Statistics Malaysia. Malaysia’s inflation in 2021 was 2.5%, up from -1.1% in 2020, 0.7% in 2019 and 1% in 2018.
Fiscal position gradually improving
Malaysia’s budget deficit stood at about 5.8% of GDP in 2022, down from shortfalls of 6.4% in 2021 and 6.2% in 2020, based on government estimates. Though it remains far higher than the pre-pandemic deficits equivalent to 3.4% of GDP in 2019, 3.7% in 2018, 2.9% in 2017 and 3.1% in 2016.
Overall, the deficit is projected to fall further to 5.5% of GDP this year, in line with the government’s commitment towards consolidating the fiscal position for a more sustainable public finance.
Similarly, the primary deficit is expected to decline to 2.9% of GDP this year, from 3.3% in 2022, 3.9% in 2021 and 3.7% in 2020.
The Malaysian government’s shortfall soared to more than 6% of GDP during the onset of the Covid-19 pandemic in 2020-21 due to the introduction of several stimulus packages, with a combined value of MYR 380 billion (US$88.4 billion) – equivalent to almost 27% of the country’s GDP.
The government’s statutory debt is currently at about 61% of GDP. The statutory debt ceiling was raised from 55% to 60% in late August 2020, and then again from 60% to 65% in 2021, because of the need to undertake more borrowing during the pandemic. The increase of the ceiling to 60% was the first since July 2009.
The statutory debt is composed of Malaysian Government Securities, Malaysian Government Investment Issues and Malaysia Islamic Treasury Bills.
“The government’s debt is currently at RM1.5 trillion, including contingent liability, but the actual debt is at RM1.2 trillion, which is about 61 per cent of the GDP,” said Deputy Finance Minister Datuk Seri Ahmad Maslan.
Malaysian ringgit strengthens
The Malaysian ringgit is noticeably strengthening in recent months, as political condition improves following the appointment of Anwar as the new prime minister.
In January 2023, the ringgit gained about 8.6% of its value against the US dollar to reach an average exchange rate of MYR4.3188 = USD1 as compared to MYR4.6908 four months ago. This partly offsets the nearly 14% depreciation of the ringgit in the two years prior due to political tension, coupled with the adverse impact of the pandemic.
In Q3 2022, Malaysia recorded a current account surplus of MYR 14.14 billion (US$3.3 billion), sharply up from a surplus of MYR 4.4 billion (US$1 billion) but down from MYR 18.21 billion (US$4.2 billion) a year ago.