In a free market, the market price is determined by the Adam Smith’s invisible hand concept, but the value of actual transactions might be a different story. Real estate is probably the most expensive purchase one would make, thus making an informed decision is crucial to avoid unnecessary losses.
In this paper, the iProperty Data Services team conducted an analysis to find out whether the housing market in Penang is overvalued or undervalued. A forecast of the state’s House Price Index is also carried out, where the derived figure is drawn from available information.
Penang’s Housing Market Overview
Penang comprises of two parts, the island and mainland. Even though it is only a bridge apart, the housing prices differ a lot. This is due to the island factor, where land is scarce. Throughout the years, house prices on the island have been increasing robustly while the prices on the mainland have been lagging behind. (Figure 1)
Based on data from the Department of Statistics and the National Property Information Centre (NAPIC), there were 450,750 households (demand) and only 397,560 existing residential units in Penang in 2015.
However, data from BCI Asia shows that there will be an incoming supply of 84,222 units and a planned supply totalling 55,584, which should address the population demand in the near future.
By doing a quick forecast on the number of households in Penang and comparing it against the number of residential units that will be coming into the market by 2020, the supply seems to match the population demand. This shows that Penang is not lagging behind in terms of housing supply. (Figure 2)
Since there are no shortages in residential housing in Penang, it begs the question – why are the house prices in the state still so high? It could be because there is a lack of investment opportunity in Penang. When an individual has excess cash in hand, the most preferred mode of investment is property.
Even with high property prices in Penang, does it mean that the homes there are overvalued? To carry out our analysis, we will attempt to use the demand and supply curve, which is used to explain price movement in real estate. It should be noted that such an analysis has never been conducted extensively due to the lack of data availability.
Although housing market values are usually determined by future earnings derived from rental rates, the housing market in Penang is very speculative because the property rent does not add up to the property price. Thus indicators like bank lending rates and rental rates do not paint a clear picture over the fluctuation in housing prices. Therefore, we used a different methodology to determine whether the housing market in Penang is overvalued or not.
Methodology – Housing Market Value
In capitalism, market forces determine the equilibrium price of the goods. When demand increases, market forces pushes the price of goods upwards, while an increase in supply will lower the price of goods and vice-versa.
In order to capture this phenomenon, we used the data garnered from iProperty.com Malaysia, which acts as a platform for individuals to buy or sell real estate property. By looking into the user behaviour, we can determine the market value of properties.
iProperty.com Malaysia is the biggest platform in terms of volume in Malaysia as it captures roughly 80% of the market, hence making which makes iProperty’s data perfect for this study.
Supply is derived from listing data in iProperty.com. From a classical economics assumption, the higher the price, the more the people will want to sell. Utilizing the number of listings and their respective asking prices, we calculated the cumulative summation to obtain an upward sloping curve. [Refer to Figure 3 Supply line]
Similarly, when it comes to demand, the lower the price, the more the buyers. A buyer who is willing to buy at a higher price will definitely want to buy at a lower price. The demand figure is derived from iProperty’s leads data, which is tracked by agent mobile number views and email enquiries sent by users.
The leads data indicates the number of people who are interested in the property. This is not the actual demand but it is the closest indicator that we have based on available data. Then by taking the cumulative summation of the leads data, we obtain a downward sloping curve which represents the demand curve. [Refer to Figure 3 Demand line]
This enables us to plot the demand and supply curve and determine the market value of housing where the two slopes intercept. This methodology is based on the assumption that all real estate housing are the same regardless of location, size, built, etc. The market value for housing should be at the equilibrium price. So, we collected the market value for each month to generate a time series data.
Figure 3 is an example of the demand and supply of housing in Penang, where the market equilibrium price for May 2016 is RM360,000.
To determine whether the houses in Penang are overpriced, we compared the actual transacted median price obtained from brickz.my against the Housing Market Price that we developed. We applied the following formula to calculate the percentage of overvalued homes:
Where TPt is the transacted price at time t, MVt is the market value at time t.
It can be seen that houses in Penang are traded 3.8% below the market value (Figure 4). As we break down the Penang market into its island and mainland components, (Figure 5 & 6) it is shown that houses on the mainland is trading below market value and its island counterpart are trading at par with market value.
We broke it down further into areas and compared the transacted prices to the respective market values. The comparison figures were divided into five categories: undervalued, moderately undervalue, normal, moderately overvalued and overvalued. The results are shown in (Figure 7).
Based on these results, the findings show that property prices in Penang as a whole, are not overvalued. In fact, the overall data shows that it is undervalued due to the mainland area. Even though property prices are high, it does not mean that the housing market is overvalued as the transactions being traded are at market value prices. It is just that the market value of properties there are high as well.
There is room for house price growth in the mainland and we expect the prices of houses on the mainland to increase by 13% in the next two years. On the other hand, the situation on the island will remain the same as current transaction prices are at market value. (Figure 8)
In conclusion, an overvalued property market could be destructive to the economy in the long run as it could lead to a housing bubble burst. This will ultimately lead to a recession.
In order to correct an overvalued market, instead of implementing preventative measures such as introducing cooling measures to tighten home loan processes, we could alternatively assist potential home buyers. For example, the government could build public transportation trains linking Tanjung Bungah, Gurney, Georgetown and Bayan Lepas to increase the market value of properties there to match the actual transacted prices.
The positive spillovers include the easing of traffic congestions and the creation of more jobs. This will definitely stimulate the market and increase the overall standard of living in these areas.
Whereas an undervalued market is less of a concern, it usually means opportunity for profits.
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DISCLAIMER: The source of brickz.my data is from the Valuation and Property Services department (JPPH) which officially records a property transaction once the stamp duty for the Sales and Purchase agreement is paid while the source of listing & leads data is from agents’ listings listed at iProperty.com. Analytics are based on the data available at the date of publication and may be subject to revision as and when more data becomes available.
This article was first published in the iProperty.com Malaysia October 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine. Better yet, order a discounted subscription by putting in your details in the form below!