The Indirect Impact of Liberalization on Detached (Luxury) Housing Market in Malaysia

Abstract

Local demand for houses in Malaysia is different than by the international buyers due to the macroeconomic factors. The growing number of international buyers might also be caused by the liberalization policy in the real estate sector. By acknowledging the possible influence of external investment, the research objective of this study includes foreign direct investment (FDI) as a determinant for housing affordability in Malaysia. This study intends to estimate the long-run effect of FDI and house price on housing affordability by employing the Johansen Cointegration approach. The extension of this study is the inclusion of liberalization using the Channel Method. We observe the impact of liberalization on housing affordability in the presence of FDI. The results of this study i) suggest that liberalization has negatively affected housing affordability; clearly the openness of the real property sector has caused an influx of foreign buyers, pushing house prices beyond the locals’ affordability level; and ii) suggest that through FDI, liberalization has changed its sign to positive, signifying the presence of FDI has caused a higher degree of liberalization to influence a higher affordability level. It shows that the openness of the real estate sector has elevated the affordability level among Malaysians for the average house but not for the luxury segment. The results imply that those who benefit from buying luxury houses are not Malaysians. Locals who might previously afford to buy luxury houses were no longer able to do so due to affordability issues. As for financial institutions, unaffordability problem has caused them to offer credit facilities to the locals. Central authorities such as housing ministries are suggested to check whether the luxury segment is largely pushed by locals or foreigners.