Links between real estate market and the national economy PDF

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LINKS BETWEEN REAL ESTATE MARKET AND THE NATIONAL ECONOMY BY:HAZREE TAJUDDIN INTRODUCTION Real estate market is one of a main contributor to the national gross domestic product (GDP). It also can be said that the real estate is represents a huge segment of the national wealth. Real estate also can b...

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LINKS BETWEEN REAL ESTATE MARKET AND THE NATIONAL ECONOMY BY:HAZREE TAJUDDIN

INTRODUCTION Real estate market is one of a main contributor to the national gross domestic product (GDP). It also can be said that the real estate is represents a huge segment of the national wealth. Real estate also can be seen as investor attraction since the development of facilities will encourage the investor to start their business in that particular country. Thus, the linkage between national economic and the real estate market can be said as important. According to (Cambridge Business Dictionary, n.d.) the definition of real estate market or property market is the buying and selling of land and buildings. When there is consumer expenditure towards real estate which mean there will have contribution to the GDP of the nation. The property industry also is the key component in the big socio-economic system as the fundamental to national economic carrier. This is prove by the report by (Bloomberg, 2004) which the real estate contribute 15 percent of the global GDP with combination of USD80 trillion assets and equities. The returns of real estate can be consider as integral part of the economic and linked to the macroeconomics and business conditions (Liu & Mei, 1992). Direct links existed between the property markets into operation of income property. Real estate can be identified as a consumer good rather than capital good. This is because the economic wellbeing of the property market depends on consumer conditions than on capital market.

THE RELATION OF REAL ESTATE MARKET AND NATIONAL ECONOMY In Malaysia, demand for property especially residential housing is resulted from rapid economic development in these particular years among urban areas in Malaysia. According to Figure 1.1, the GDP for Malaysia in year 2015, 2016 and

2017 is USD296.43 Billions, USD296.54 Billions and USD314.50 Billions respectively. Based on (Valuatian and Property Services Department, 2017) through property market report (PMR 2017) real estate sector is contribute 6.6% growth to the GDP of Malaysia with value of RM45,788 Millions in 2015, 6.9% in 2016 with RM48,925 Millions and 7.4% in the year of 2017 with value of RM52,535 Millions. This shown that, the property market in Malaysia is continuing in growth to contribute in the GDP. The property market in Malaysia is divided into two sectors which is for occupation by owner or a tenant and second is meant as an investment (Nehru, 2014). Both sector is affecting the national economic especially when more consumer spending.

Figure 1.1: Graph of Malaysia GDP Sources: (World Bank, 2018) As said before, the major relationship between real estate and national economy is real estate effectively promotes GDP of the national economy (Wang, 2007). When said about property market, we can relate with consumer spending. More spending will contribute more to GDP. However, when it is about property most consumer are unable to buy by its own money with lump sum style. The property is acquired through the process of mortgage from financial

institution. Mortgages are greatest sources of liabilities for household familiarly in Malaysia. In spite of this, economic downturn can be at risk for the banking system if the consumer takes out large loans comparing to their household income. The effect is toward the demand and supply of the property. When the price of houses is increasing, consumer are more attracted to spend and borrow more when their feel confident with the investment (Bank of England, 2017). Meanwhile, when the price is going down, people will tend to cut down spending and the demand towards property is less. Transaction for new property will directly contributes to total output or GDP. In other hands, transactions between existing property does not affect the GDP same way as the new property. This is because new development area or new scheme will create jobs and local area also will gain profit through the business economic in the surrounding is increasing with demand, meanwhile, this effect will not effective to the transaction of the existing property but the economic still beneficial to other industry such as the service industry for example legal fees and other professions. The government of Malaysia establish that residential is basic need of citizen. Since then, the government either the federal government or state government take an initiatives to establish housing policies that highlighting the private sector in housing production and delivery (Tze, 2013). All these evidence is showing that the real estate industry is no doubt contributed in GDP of the national economic not only in Malaysia but the rest of the world.

As the demand towards property is increase, the development of the real estate market will increase in supply. This will give positive effect to the employment rate (Wang, 2007). For example, according to (Valuatian and Property Services Department, 2017) there are 104 new development project in state of Selangor in 2017 is approved and the estimated labour is 5,483. Development activity will encourage higher employment growth (Sternlib & Hughes, 1997). The number of employment will give the movement of national economic bubble. However, the development needs to be maintain in a proper ratio with the development of national economy, or it will give a threat to other

sector such as financial industry. In spite of that, the cost of construction will increase due to large amount of the labour force involved in the construction. Other than that, a construction development that are involving a lot of professional worker with a certain qualification and education compared with labour forced who less educated will cause increase in cost of wages for that particular development. Thus, the buyer will bare this hidden cost and forced to buy at higher price. In other hands, the rises of unemployment rate will affect the property market (Lim, 2016). It is either newcomers who wants to join the property sector or the existing consumer of property market. This is when less people is afford to buy the property since they are unable to secure deposit or loan from financial institution since they are unemployed. Worst case is when the existing consumer is unable to obligate their monthly mortgage installment. This fear will avoid consumer from entering into property market. However, according to the Figure 1.2 unemployment rate is at 3.4% as August 2018 which seen lower because it is indicate that the stable rate of unemployment is 3%. This is shown that the Malaysian almost experience full employment. We can see that the effect of unemployment is just a small effect to the property market in current economic situation.

Figure 1.2: Graph of Unemployment Rate Sources: (Department of Statistics Malaysia, 2018) Malaysian developer is facing a basic struggle of mismatch of supply and demand of the property (Begum, 2018). The supply and demand of the property market is influenced by two factors which is external and local factor. External factor can be identified as local, regional, national or international. However, for local factors includes surrounding economy, demographic influences, institution and more. Literally, when the supply is more than the demand the effect would be the property price is remain unchanged or will go down, however, (Lim, 2016) opinion is this statement is depends on the location and other variable. New development requires allocating some unit for affordable units but the units is unsold due to lack of interest or the pricing are not affordable. According to (Bank Negara Malaysia, 2018) it is estimated that the maximum affordable house is RM282,000 but, the actual median house price is RM313,000. More of the unsold residential supply in Malaysia is because of the not right in price tagging, not attractive locations and mismatched of product offering to the consumer (Begum, 2018). Residential properties in Kuala Lumpur is not affordable at all with most units priced more than RM490,000 and in Selangor with RM300,000 compared to the market price of RM223,704 (Khazanah Investment Institute,

2018). However, the (Bank Negara Malaysia, 2018) categorized residential units where in ranging of RM300,000 to RM500,000 is not affordable for consumer who received median income level. 39 percent of new houses launched in the 2016 to 2017 is priced up to RM300,000 based on record from (The National Property Information Centre, 2017). This shows that the number is insufficient to fulfill the demand by half of the household in Malaysia earn the median income. In order to overcome this issue, central bank have suggested strategies to effectively bridge affordable housing gap in Malaysia through centralization of the initiatives, establish integrated database and managed planning and allocation registration, reducing cost barrier, enhancing financial literacy and strengthening legal framework for improving the rental market (Begum, 2018).

Whenever there a condition of supply of good, for instance monetary, with a constant limited supply of other good, for example housing, therefore the price of the house will go up since it is more valuable than the former. Current property market in Malaysia is rising drastically in housing price. This is because the value of Malaysia currency is downtrend in record, meanwhile the land in demanded area is scarce to supply the demand. (iProperty Malaysia News Team, 2017). However, during inflation there are no doubts that most things in the economic will drastically increase in price. Impact from increase in price will also feel by the cost of raw material for constructing of property to escalate. Thus, the rising of money supply causing inflation and also property prices to getting higher. This is proven when the price of housing market in the year 2009 is so high until the most of Malaysia focused to middle income group unaffordable to them (Said & Ab Majid, 2014).

Consumer’s confidence is really important in investment especially in property market. People’s fear to invest in housing market due to bad economic condition. This is because, the property investment is related to liquidity effects. Interest rate is the macroeconomics variable when comparing with the property market. Housing price may be affected by the lending rate by financial institution.

Higher availability of credit is provided by the financial institution means the institution is provide low lending rates to encourage future economic activity. Demand of the housing is increase when more credit is available (Barakova, Bostic, Calem, & Wachter, 2003). However, low lending rate enable property price to go higher. Higher demand of property then will cause the housing price will increase. Low interest rate is opportunity to buyer make some investment such as buying more property. To constraints this matter, there are way to influence the demand by the households should abide borrowing constrictions because of the imperfects in financial market then the borrower can borrow according to how much securities net worth. Next is the household should recognized the assests might have significant influence mean the consumption over the overall life cycle of the property. Third is housing price movement on credit supply will impacted by value of the bank capital. Therefore, the housing loan will secured by the value of loans secured. There a risk taking capacity of the banks affected by the drops in the housing price. The financial institutions will give more lending to the public. Capital flows influence the demand and supply of the property resulting to the property price as well. As summarize, can be said that changes in interest rates will of course affect the ability to purchasing the property by buyer. When interest rate is falls, the ability to secure a mortgage to purchase a property is decrease. In result, the demand for property is high and will lead to rising in price.

Real estate market can be considered as catalyst to the development of related industries. Characteristics of the real estate industries such as long chains of course will lead to the development of other industries. The huge implication is to the construction industry and manufacturing (Wang, 2007). When a place is developing, therefore, the increase of population will generate demand and supply will come to this particular area. It is mean as the other consumer goods and services. The demand to the economic welfare is also increase for that particular area. When the facilities are good, investor will attracted to invest in the area either local or international. In the long run, can be

expected that a flow on effect to the international business activities will create demand for hospitality services such as hotels, amusement park, health care and more (Mahalingam, 2018). In spite of that, industrial property sector will promotes the growth of e-commerce. E-commerce is recognized as one of the booster to the revenue growth of the national economic through the demand for goods and industrial spaces (Mohd Saheh, 2018). The coming of international investor will create opportunity for knowledge transfer.

CONCLUSION Real estate market and national economy has a strong links because the real estate is one of the important component or sector to the macroeconomics. The interaction is strongly especially in contribution to national GDP, employment and unemployment rate, supply and demand of property, inflation rate, interest rate and also catalyst to development of related industry. Direct contribution to GDP can be said is the effect from the transaction of new property, but when to the sub sales market the GDP contribution is indirect which is goes to other part within the related sector. When toward the employment and unemployment rate, it sees that the property market is related indirectly as determinant variable. This is especially to the built environment, when the new area is developed and increase in property, therefore the economic activity will be active. Supply and demand, inflation rate and interest rate are related with each other. This can be conclude that, when the interest rate is low, thus, the demand is increase, then the supply of property is increase. Meanwhile, the inflation rate will rise due to those conditions. Real estate market also as a catalyst to other sector. Investor will attract to invest in country which has a good facilities through development of property, thus, the local economic will move forward....