Does Home Financing Promote Affordability of Home Ownership in Malaysia? An Empirical Analysis Between Islamic and Conventional Banks
DOI:
https://doi.org/10.31436/ijema.v25i3.436Abstract
The aim of this study is to examine the influence of home financing offered by both Islamic and conventional banks and affordability of home ownership (as measured by House Price/GDP per capita) in Malaysia. At the same time, it attempts to assess the effects of employment and interest rate as measured by Overnight Policy Rate (OPR) on home ownership affordability. The study employs the Auto Regressive Distributed Lag Model (ARDL) on yearly data from 2007 to 2014 in order to investigate the link between affordability and selected banking variables such as total home financing by Islamic banks and OPR. Data were extracted from the National Property Information Center (NAPIC) and Bank Negara Malaysia (BNM) Monthly Statistical Bulletin. This study finds that there are cointegrating relationships among all the selected variables at the selected lag length. Home financing of both Islamic and conventional banks were found to be significant in influencing Affordability of Home ownership in Malaysia. Consistent with the fundamentals of Islamic finance, our findings further suggest that OPR (interest rate) is less significant in determining home affordability in the case of Islamic home financing compared to conventional home loan. This study is an empirical attempt to analyze the effect of Islamic home financing as well as conventional loan on affordability. The approach used is technically not new, but it offers better insights into the applicability of Islamic finance in promoting affordability of home ownership. This finding therefore warrants a more in-depth analysis to explore alternative home financing mechanisms such as rental rate pricing to promote home ownership affordability among low to medium income earners in Malaysia.
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Bujang, A.A., W.R. Anthony Jiram, H. Abu Zarin, and F.H. Md. Anuar. “Measuring the Gen Y Housing Affordability Problem.†International Journal of Trade, Economics and Finance 6, no. 1 (2015): 22-6.
Brown, R.L., J. Durbin, and J.M. Evans. “Techniques for Testing the Constancy of Regression Relations Over Time,†Journal of the Royal Statistical Society, Series B, 37, (1975), 149-163.
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Davenport, J. “The Effect of Demand and Supply Factors on the Affordability of Housing.†The Park Place Economist 11, no. 1 (2003): 44-9.
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Esruq-Labin, A.M.J., A.I. Che Ani, N.M. Tawil, M.N.M. Nawi, and M.A. Othuman Mydin. “Criteria for Affordable Housing Performance Measurement: A Review.†EDP Sciences (2014): 1-7.
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Granger, C.W.J. “Investigating Causal Relations by Econometric Models and Cross-Spectra Methods.†Econometrica 37, no. 3 (1969): 424-38.
Hashim, Z.A. “House Price and Affordability in Housing in Malaysia.†Akademika 78, no. 1 (2010): 37-46.
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Koop, G., M.H. Pesaran, and S.M. Potter. “Impulse Response Analysis in Nonlinear Multivariate Models.†Journal of Econometrics 74, no. 1 (1996): 119-47.
Kutty, N. “A New Measure of Housing Affordability: Estimates and Analytical Results.†Housing Policy Debate 16, no. 1 (2005): 113-42.
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McCord, M., S. McGreal, J. Berry, M. Haran, and P. Davis. “The Implications of Mortgage Finance on Housing Market Affordability.†International Journal of Housing Markets and Analysis 4, no. 4 (2011): 394-417.
Md Sani, N. “Residual Income Measure of Housing Affordability.†International Journal of Advances in Engineering & Technology 5, no. 2 (2013): 1-8.
Md Sani, N. “Price to Income Ratio Approach in Housing Affordability.†Journals of Economics, Business and Management 3, no. 12 (2015): 1190-93.
Md Sani, N., and M.A. Che Munaaim. “Sustainable House Principle In Affordable House.†International Proceedings of Economics Development and Research (ICITE2012), Harbour Plaza 8 Degrees Hotel, Hong Kong (2012): 1-4.
Mohd Yusof, R., S.H. Kassim, M.A. Majid, and Z. Hamid. “Determining the Viability of Rental Price to Benchmark Islamic Home Financing Products: Evidence from Malaysia.†Benchmarking: An International Journal 18, no. 1 (2011): 69-85.
Montagnoli, A., and Nagasayu, J. “An Investigation of Affordability in the UK Regions.†Strathclyde Discussion Papers in Economy. University of Strathclyde, Glasgow (2013): 13-16.
Narayan, P.K. “The Saving and Investment Nexus for China: Evidence from Cointegration Tests.†Applied Economics 37, no. 17 (2005): 1979-90.
National Property Information Center (NAPIC). Property Market Report First Half 2014, Kuala Lumpur, 2014.
Ndubueze, O.J. “Measuring a Housing Affordability: A Composite Approach.†Paper presented at the ENHR 2007 International Conference Sustainable Urban Areas, Rotterdam, Netherlands, 2007.
Ndubueze, O.J. “Urban Housing Affordability and Housing Policy Dilemmas in Nigeria.†PhD thesis, Centre for Urban and Regional Studies, School of Public Policy, The University of Birmingham, 2009.
Nwuba, C.C., I.U. Kalu, and J.A. Umeh. “Determinants of Homeownership Affordability in Nigeria’s Urban Housing Markets.†International Journal of Housing Markets and Analysis 8, no. 2 (2015), 189-206.
Pesaran, M.H., and Y. Shin. “Generalized Impulse Response Analysis in Linear Multivariate Models.†Economics Letters 58, no. 1 (1998): 17-29.
Pesaran, M.H., Y. Shin, and R.J. Smith. “Testing for the Existence of a Long-Run Relationship.†DAE Working Paper, No. 9622. Department of Applied Economics. University of Cambridge, Cambridge, 1996.
Pesaran, M.H., Y. Shin, and R.J. Smith. “Bounds Testing Approaches to the Analysis of Level Relationship.†Journal of Applied Econometrics 16, no. 3 (2001): 289-326.
Quigley, M.J., and S. Raphael. “Is Housing Unaffordable? Why Isn’t It More Affordable?†Journal of Economic Perspectives 18, no. 1 (2004): 191-214.
Rea, W., J. Yuen, J. Engeland, and R. Figueroa. “The Dynamics of Housing Affordability.†Perspectives – Statistics Canada 75-001-X (2008):15-26.
Stone, M.E. “A Housing Affordability Standard for the UK.†Housing Studies 21, no. 4 (2006): 453-76.
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Wan Abd Aziz, W.N.A., N.R. Hanif, and K. Singaravello. “A Study on Affordable Housing Within The Middle Income Households within The Major Cities and Towns in Malaysia.†Journal of Basic and Applied Science,(2011): 258-267.
Wilson, E., and R.R. Callis. “Who Could Afford to Buy a Home in 2009? Affordability of Buying a Home in United States.†Current Housing Reports H121/13-02. US Census Bureau, May, 2013: 1-8.
Worthington, A., and H Higgs. “Macro Drivers of Australian Housing Affordability, 1985-2010.†Studies in Economics and Finance 30, no. 4 (2013): 347-60.
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Bank Negara Malaysia (BNM). List of Islamic Banks. 2015. http://www.bnm.gov.my/index.php?ch=li&cat=islamic&type=IB&fund=0&cu=0
Bank Negara Malaysia (BNM). BNM Monthly Statistical Bulletin. 2014. http://www.bnm.gov.my /index.php?ch=en_publication_synopsis&pg=en_publication_statistical_rpt&ac=4&lang=en&eId=box1.
Berry, M., and J. Hall. “Policy Options for Stimulating Private Sector Investment in Affordable Housing Across Australia. Stage 1 Report: Outlining The Need for Action.†AHURI Research Paper. Melbourne: Australian Housing and Urban Research Institute, 2001.
Bramley, G. “Affordability, Poverty and Housing Need: Triangulating Measures and Standards.†Journal of Housing and Built Environment 7, no. 2 (2012): 133-51.
Bujang, A.A., W.R. Anthony Jiram, H. Abu Zarin, and F.H. Md. Anuar. “Measuring the Gen Y Housing Affordability Problem.†International Journal of Trade, Economics and Finance 6, no. 1 (2015): 22-6.
Brown, R.L., J. Durbin, and J.M. Evans. “Techniques for Testing the Constancy of Regression Relations Over Time,†Journal of the Royal Statistical Society, Series B, 37, (1975), 149-163.
Chiuri, M.C., and T. Jappelli. “Financial Market Imperfection and Home Ownership: A Comparative Study.†2002. http://ssrn.com/abstract=312003.
Davenport, J. “The Effect of Demand and Supply Factors on the Affordability of Housing.†The Park Place Economist 11, no. 1 (2003): 44-9.
Demographia, 11th Annual Demographia Annual Housing Affordability Survey: 2015.
http://www.demographia.com/dhi2015.pdf
Department of Statistics Malaysia (DOSM). 2015. https://www.statistics.gov.my/images/stories/files/LatestReleases/population/Web_Release_Ciri_IR2010.pdf
Engle, R.F., and C.W.J. Granger. “Cointegration and Error Correction: Representation, Estimation and Testing.†Econometrica 55, no. 2 (1987): 251-76.
Esruq-Labin, A.M.J., A.I. Che Ani, N.M. Tawil, M.N.M. Nawi, and M.A. Othuman Mydin. “Criteria for Affordable Housing Performance Measurement: A Review.†EDP Sciences (2014): 1-7.
Gans, J., and S. King. “The Housing Lifeline: A Housing Affordability Policy.†Agenda 11, no. 2 (2004): 143-55.
Granger, C.W.J. “Investigating Causal Relations by Econometric Models and Cross-Spectra Methods.†Econometrica 37, no. 3 (1969): 424-38.
Hashim, Z.A. “House Price and Affordability in Housing in Malaysia.†Akademika 78, no. 1 (2010): 37-46.
Ho, F. “What is True Affordability?†The Star. (January 4, 2015). http://www.thestar.com.my/business/investing/2015/01/04/what-is-true-affordability/
Johansen, S. “Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models.†Econometrica 59, no. 6 (1991): 1551-80.
Khazanah Research Institute (KRI). Making Housing Affordable. Kuala Lumpur: Khazanah Research Institute, 2015.
Koop, G., M.H. Pesaran, and S.M. Potter. “Impulse Response Analysis in Nonlinear Multivariate Models.†Journal of Econometrics 74, no. 1 (1996): 119-47.
Kutty, N. “A New Measure of Housing Affordability: Estimates and Analytical Results.†Housing Policy Debate 16, no. 1 (2005): 113-42.
Lerman, R., and L. Hendey. Improving Home Affordability Through Low Interest Rates. How Much Would Homeowners in Low Income Areas Save? Washington D.C.: The Urban Institute, 2011.
Linneman, P.D., and I.F. Megbolugbe. “Housing Affordability: Myth or Reality?†Urban Studies 29, no. 3/4 (1992): 369-92.
Luffman, J. “Measuring Housing Affordability.†Perspectives – Statistics Canada 75-001-XIE (2006), 16-25.
Malaysia Government Budget 2016. http://www.bajet.com.my/2016-budget-highlights/
MacDonald, S. “Supply and Demand in the Penang Housing Market: Assessing Affordability.†Penang Institute Research Paper, 2011.
Malaysia Government Budget 2016. http://www.bajet.com.my/2016-budget-highlights/
McCord, M., S. McGreal, J. Berry, M. Haran, and P. Davis. “The Implications of Mortgage Finance on Housing Market Affordability.†International Journal of Housing Markets and Analysis 4, no. 4 (2011): 394-417.
Md Sani, N. “Residual Income Measure of Housing Affordability.†International Journal of Advances in Engineering & Technology 5, no. 2 (2013): 1-8.
Md Sani, N. “Price to Income Ratio Approach in Housing Affordability.†Journals of Economics, Business and Management 3, no. 12 (2015): 1190-93.
Md Sani, N., and M.A. Che Munaaim. “Sustainable House Principle In Affordable House.†International Proceedings of Economics Development and Research (ICITE2012), Harbour Plaza 8 Degrees Hotel, Hong Kong (2012): 1-4.
Mohd Yusof, R., S.H. Kassim, M.A. Majid, and Z. Hamid. “Determining the Viability of Rental Price to Benchmark Islamic Home Financing Products: Evidence from Malaysia.†Benchmarking: An International Journal 18, no. 1 (2011): 69-85.
Montagnoli, A., and Nagasayu, J. “An Investigation of Affordability in the UK Regions.†Strathclyde Discussion Papers in Economy. University of Strathclyde, Glasgow (2013): 13-16.
Narayan, P.K. “The Saving and Investment Nexus for China: Evidence from Cointegration Tests.†Applied Economics 37, no. 17 (2005): 1979-90.
National Property Information Center (NAPIC). Property Market Report First Half 2014, Kuala Lumpur, 2014.
Ndubueze, O.J. “Measuring a Housing Affordability: A Composite Approach.†Paper presented at the ENHR 2007 International Conference Sustainable Urban Areas, Rotterdam, Netherlands, 2007.
Ndubueze, O.J. “Urban Housing Affordability and Housing Policy Dilemmas in Nigeria.†PhD thesis, Centre for Urban and Regional Studies, School of Public Policy, The University of Birmingham, 2009.
Nwuba, C.C., I.U. Kalu, and J.A. Umeh. “Determinants of Homeownership Affordability in Nigeria’s Urban Housing Markets.†International Journal of Housing Markets and Analysis 8, no. 2 (2015), 189-206.
Pesaran, M.H., and Y. Shin. “Generalized Impulse Response Analysis in Linear Multivariate Models.†Economics Letters 58, no. 1 (1998): 17-29.
Pesaran, M.H., Y. Shin, and R.J. Smith. “Testing for the Existence of a Long-Run Relationship.†DAE Working Paper, No. 9622. Department of Applied Economics. University of Cambridge, Cambridge, 1996.
Pesaran, M.H., Y. Shin, and R.J. Smith. “Bounds Testing Approaches to the Analysis of Level Relationship.†Journal of Applied Econometrics 16, no. 3 (2001): 289-326.
Quigley, M.J., and S. Raphael. “Is Housing Unaffordable? Why Isn’t It More Affordable?†Journal of Economic Perspectives 18, no. 1 (2004): 191-214.
Rea, W., J. Yuen, J. Engeland, and R. Figueroa. “The Dynamics of Housing Affordability.†Perspectives – Statistics Canada 75-001-X (2008):15-26.
Stone, M.E. “A Housing Affordability Standard for the UK.†Housing Studies 21, no. 4 (2006): 453-76.
UN Habitat (2009). http://mirror.unhabitat.org/content.asp?cid=6142&catid=571&typeid=24&subMenuId=0
Wan Abd Aziz, W.N.A., N.R. Hanif, and K. Singaravello. “A Study on Affordable Housing Within The Middle Income Households within The Major Cities and Towns in Malaysia.†Journal of Basic and Applied Science,(2011): 258-267.
Wilson, E., and R.R. Callis. “Who Could Afford to Buy a Home in 2009? Affordability of Buying a Home in United States.†Current Housing Reports H121/13-02. US Census Bureau, May, 2013: 1-8.
Worthington, A., and H Higgs. “Macro Drivers of Australian Housing Affordability, 1985-2010.†Studies in Economics and Finance 30, no. 4 (2013): 347-60.
Yeong, E. The Sun Daily. 28 September 2015. http://www.thesundaily.my/news/1564847.
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Published
2017-11-30
How to Cite
Mohd Yusof, R., Abd Wahab, N., & Hamzah, H. (2017). Does Home Financing Promote Affordability of Home Ownership in Malaysia? An Empirical Analysis Between Islamic and Conventional Banks. International Journal of Economics, Management and Accounting, 25(3), 601–627. https://doi.org/10.31436/ijema.v25i3.436
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