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How to identify property cycles for equity investment opportunities on Bursa Malaysia


This article looks at the various ways to identify a property cycle. In the context of investing in property development companies listed on Bursa Malaysia, the Malaysian House Price Index is the best metric to use for identifying the Malaysian property cycle. 

© shariffc / 123RF

It is commonly acknowledged that the property market is cyclical. According to renowned Finance Professor, Professor Aswath Damodaran, cyclical and commodity companies share a common feature. Their value is often dependent on the movement of a macro variable, namely commodity price – than on the firm’s specific characteristics.

The biggest problem in analysing and valuing property development companies is that the earnings reported in the most recent year are a function of where they are in the cycle. Extrapolating those numbers into the future can result in wrong valuations. One way around this is to “normalize” the earnings and cash flows over the cycle. This requires you to have an understanding of the performance over the cycle. But what exactly is a property cycle?

As defined by Wikipedia, a property cycle is a sequence of recurrent events reflected in demographic, economic and emotional factors that affect supply and demand for property, subsequently influencing the market. The property cycle follows a predictable pattern, which reveals three distinct phases namely Boom followed by Slump and finally Recovery before the next cycle repeats. There are other descriptions of these phases – for example, some use Recovery, Explosive and Recession to describe them.

For a retail investor, the question is not the description of the phases. The more important question is what are the metrics or indicators to use to identify the pattern? In other words, how do you identify the start and end of the current cycle in real-time?

In this article, we will take a look at the Malaysian property cycles and suggest the best metric to identify the cycle in real-time. Once you have this information, you can then determine the performance of property development companies over the cycle. This is important for assessing whether there is a stock market investment opportunity. Alternatively, if you are a property buyer hunting for bargains, knowing when is the trough of a cycle will be useful.

Article Summary

  • I looked at 3 metrics to identify the Malaysian property cycle – Malaysian House Price Index (HPI), Residential Starts and Residential Transactions.
  • How many property cycles were there in Malaysia from 2002 to 2020?  These 3 metrics do not give the same answer. It also varies depending on whether you look at trendlines or % annual changes. Refer to Charts 1 and 2.

malaysian property cycle matrix
Chart 1: Identifying Property Cycles with Trendlines. © Dato Eu Hong Chew

malaysian property cycle - annual changes
Chart 2: Identifying Property Cycles with Annual Changes. © Dato Eu Hong Chew

  • From an equity investment perspective, which metric had the best link with the revenue of the property companies? The HPI had the best correlation at 0.87 or higher.

What does the Malaysian property cycle mean?

The majority of articles online used price as the metric to identify a property cycle. Of course, price was not the only method. Some looked at property activities whereas the more academic articles constructed their own econometric indicators.

Table 1 summarizes the results of this ‘back-of-envelope” survey.

malaysian proeprty cycle
Table 1: Google Search Results. © Dato Eu Hong Chew

(a) These are generally non-pricing statistics. Examples are the number of transactions, unsold stocks, vacancies, or even construction activities.
(b) These included econometric indicators developed by the respective authors. These could involve pricing and non-pricing data.
(c) Some of the media articles referred to other articles listed in the top 2 pages of the Google search results. In such cases, I ignored them thereby reducing the number of articles.

An example of how prices are used to identify the Malaysian property cycle is this 2019 article “What is the 18-year property cycle & how will it make you a better investor?” The article used the annual change in the Malaysian House Price Index to identify the Malaysian Property cycle as illustrated below.

malaysian property market cycle
Chart 3: Malaysian Property Cycle. ©

There are even econometric models that build on the House Price Index to create a metric to identify the cycle as illustrated in Chart 4.

Malaysian Property Cycle - Econometric Model
Chart 4: Malaysian Property Cycle – Econometric Model. © Forecasting Malaysian Property Cycle: An Indicator-Based Approach

But is the House Price Index the only way to define a property cycle? This article looks at alternative ways to identify the property cycle.

There are of course several components of the property market – residential, retail, and industrial. For the purpose of this article, I will focus on the residential market since it is the largest component in Malaysia.

According to Savills, China and the US together make up 42% of global property value alone. China owns the largest share home of global real estate (by value) at USD 42.7 trillion, just ahead of the USA at USD 42.1 trillion. However, as there are more online resources about the USA, it was natural that I looked at the USA for references.


? Capital Growth or Rental Yield: Which is More Important in Property Investment?
? Is residential real estate still a good hedge against inflation in Malaysia?

Housing Market Indicators in the USA

© hxdbzxy/ 123RF

There are several metrics that can be used to track the performance of the property sector in the USA. Investopedia listed the following as the top US Housing Market indicators:

  • Construction spending – This covers construction work done on new structures. It also includes improvements to existing structures in both private and public sectors.
  • Housing Starts – This focuses on the houses that builders have just started to work on.
  • Home sales – Various realtors such as the National Association of Realtors (NAR) provide a report on the number of used homes sold every month. There are also pending sales reports.
  • Housing Market Index – For example, the National Association of Home Builders (NAHB) puts out a monthly NAHB/Wells Fargo Housing Market Index that looks at the level of confidence that builders have in the single-family housing market. The AEI Housing Market Indicators present a comprehensive picture of the state of the housing market in America. Their metrics included home prices and supply, new construction sales and additions to the housing stock, lending standards, housing affordability and land prices.
  • Housing Price Indices – These included those by FRED and the S&P/Case-Shiller US National Home Price Index.

In the Malaysian context, not all the above information is readily available to the retail investor. I would rank the ease of getting the Malaysian data as follows:

  • Malaysian House Price Index – The Malaysian National Property Information Centre, Valuation and Property Services Department, Ministry of Finance is responsible for publishing the House Price Index.
  • Residential transactions data are provided in the Property Market Report published by the Valuation and Property Services Department (JPPH). Data are available in terms of the number of units and property value. I would consider this equivalent to the US Home sales information.
  • Residential Starts – The same Property Market Reports have sections on Residential Starts. I would equate these to the US Housing Starts data. To a certain extent, residential starts reflect the housing construction activities.

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Performance of the Malaysian metrics

Chart 3 illustrated how pricing information had been used to identify the property cycle. How would the Residential transactions and Residential Starts perform compared to the House Price Index?

I compared these 3 metrics using 2 approaches:

  • Looking at the trends of the metrics from 2002 to 2020 as shown in Chart 1. Note that for ease of comparison, I constructed the index for each metric. For the respective index, the value in 2002 was assumed to be 100. The index value for the various years was then computed relative to this base of 100.
  • Looking at the annual percentage changes of the respective indices as shown in Chart 2.

    Referring to Chart 3, the period 2002 to 2018 represented one property cycle. However, Residential Starts and Residential Transactions showed a different picture.

    • Looking at House Price Index (HPI) trend in Chart 1, you could not see the cyclical pattern. Part of the reason for this is that the value of the HPI was also increasing over time. Thus the growth had masked the cyclical pattern. But you could make out the cyclical pattern with the % annual change in the HPI in Chart 2.
    • Based on the Residential Starts Index, you could see more than one cycle during this period. This can be seen from both the trend and annual change charts.  Note that the relatively “horizontal” Residential Starts Index trendline meant that there has not been significant growth in the number of Residential Starts. In fact, the 2020 Residential Starts was lower than that in 2002.
    • Looking at the number of Residential Transactions, Chart 1 shows one cycle. But looking at the % annual change of this metric indicates more than one cycle during the 2002 to 2020 period. I would also like to point out that the “horizontal” Transaction trendline meant that there has not been any growth in the number of Residential Transactions in 2020 compared to 2002.

      The challenge then is deciding which of these metrics shows the real picture. Remember that you are trying to determine the start and end of the cycle in real-time. I would argue that the property cycle is the result of 4 key factors – demographics, interest rates, the general economy and government policies. As such looking at only one metric such as price alone may not show an accurate picture.

      How long does a property market cycle last?

      The article cited earlier talked about an 18-year cycle.

      “Sometime in the early 20th century, Homer Hoyt, a real estate professional discovered that property prices are cyclical. He also realized that these cycles happened in almost perfect 18-year cycles. Hoyt’s research was popularised by economist, Fred Harrison, in his book “Boom Bust.” Interestingly, this book which was written in 2005, predicted the 2008 housing crash in the USA.”

      According to the article, the current cycle started in 2000 and the end of the cycle is then 2018.  But I am sure you would all agree that given the Covid-19 impact, the current cycle is far from over. I have another example to illustrate the shortcomings of the 18 years cycle concept. The chart below shows the US Housing Starts over the last 70 years. You can see the cyclical pattern.

      • Based on starting from the peak, the current cycle is now about 18 years old and it does not look like it has reached its latest peak.
      • From 1968 to 1980, there appeared to be at least two cycles. This meant that the average cycle duration is about 6 years.

      property market cycle duration
      Chart 5: Housing Starts. © Trading Economics

      The point I am making is that the 18 years cycle is not cast in stone. As such it is even more important to be able to identify the start and end of the current cycle in real-time.

      Property cycle metrics vs the property sector revenue

      © galinast/ 123RF

      The 3 metrics do not provide the same answer about when a property cycle starts and finishes. One way to decide which is the best one to use is to then relate it to the purpose of identifying the cycle. My perspective is that of a retail stock market investor. You are trying to determine where you are in the cycle in real-time so that you can assess the cyclical performance. This is because you are trying to determine whether there is an opportunity to invest in the property development companies on Bursa Malaysia.
      As such, I next assessed which of the metrics had the best link with the performance of the Malaysian property development companies. To do this, I compared the performance of these 3 metrics with the revenue of the Bursa Malaysia property counters.  I had already determined the performance of the Bursa Malaysia property companies in my article “Will the Malaysian Property industry turn around by 2024?”. In that article,  I used the performance of 85 Bursa Malaysia companies in the property sector to represent the industry.
      Unfortunately, I did not have the property sector data going back to 2002. Rather the data I had only went back 11 years ie from 2010 to 2020. This is about half the cycle represented in Chart 3. Even with this half-cycle comparison, you can see some links as shown in Charts 6 and 7.

      property cycle matrixs
      Chart 6: Property Cycle Metrics vs Property Sector Performance – Trendlines. © Dato Eu Hong Chew

      property market performance
      Chart 7: Property Cycles Metrics vs Property Sector Performance – Annual Changes. © Dato Eu Hong Chew

      Which of the property cycle metrics had the best link with the revenue of the property companies? To answer this question, I carried out 2 correlation analyses:
      • Correlating the Property sector revenue trendline with the 3 metrics trendlines.
      • Correlating the annual changes in the Property sector revenue with the annual changes in the 3 metrics.
      For each of the analyses, I compared:
      • The same year’s performance between the Property sector revenue and the metrics.
      • The Property sector revenue lagged the metrics by one year. For example, the 2010 Residential Starts was compared with the 2011 Property sector revenue.
      The results of the correlation analysis are shown in Tables 2 and 3. Generally, correlations are only meaningful if we have values > 0.7. I have highlighted the meaningful values in green in the tables.

      property cycle correlation
      Table 3: Correlation based on Annual Changes. © Dato Eu Hong Chew

      The analysis suggests that the Malaysian House Price Index (HPI) is the best indicator of how the property sector will perform. This is looking at both the trendlines and the % annual changes. The results show that this can be a leading indicator of the performance of the Malaysian property sector revenue.
      The next best metric is the Residential Starts. I would use this as a leading indicator for both the trendlines and % annual changes. The surprise was the low correlation between the Transactions and the Malaysian Property sector revenue. One possible explanation is that the Transactions covered the following parties:
      • Individual and individual.
      • Developer and individual.
      • Company and individual.
      • Company and company.
      • Others.
            In other words, the transactions between the Property development companies (Developers) and the buyers was only part of the total transactions.  For example, in 2020, the Developer and Individual transactions represented about 20% of the total transactions.
            However, I also did a correlation analysis between the property sector revenue and just the transactions between the Developer and Individual. The results were not meaningful. I had earlier quoted Investopedia on the link between the property cycle and that of the general economy. The correlation between the Malaysian GDP and the Property sector revenue based on the 11 years period were:
            • 0.86 based on the trendlines.
            • 0.54 based on the % annual changes.
            You should not be surprised by the findings.

            Shortcomings of this analysis

            When you look at the analysis and correlations, you must consider some of the shortcomings of the analysis. I present some of my concerns here.
            According to JPPH, the Malaysian House Price Index (HPI) is based on the following:
            “Price change is estimated by pricing a basket of house characteristics of the “average” house transacted in the current period and comparing this price with the price of the same basket of house characteristics in the base year (2010). Fundamentally, it is a ratio that shows how much the cost of housing has changed between two periods (the base and the current periods) if the house buyers maintain the standard of living in the latter period.”
            Going by this definition, the Malaysian House Price Index does not directly represent the prices transacted between developers and individuals. Based on my property development experience, developers take several factors into consideration when pricing their houses. The changes in the HPI have some influence but it is not the only factor.  As such, I was surprised by the high correlation between the HPI and the Property sector revenue.
            Secondly, the property development companies making up the property sector are not just involved in residential developments. Many also develop commercial properties such as shop-houses, offices and even shopping malls. Hence, I did not expect a high correlation between the HPI and the Property sector revenue. I would have thought that there would be a better correlation between the Residential Starts and the Property sector revenue compared to the Malaysian House Price Index.
            One way to interpret this “anomaly” is that 11 years of data may not be sufficient enough for good analysis.  Another explanation for the anomaly is that 2010 to 2020 only covered part of the “Explosive and Recession” phases. These phases could have a higher correlation between the HPI and the Property sector revenue compared to a full cycle comparison.
            The trendline and annual changes for each metric illustrated in Charts 1 and 2 were based on the same data. Technically both charts should give the same answer when it comes to determining the number of cycles between 2002 and 2020. However, as a retail investor, you would be looking for patterns visually. I would like to point out that I see a different picture when looking at trendlines compared to looking at annual changes.
            Having said the above, I would state that investing is always based on incomplete data. As a value investor, you are trying to project future performance and invest based on your outlook. Any tool to help provide an evidence-based approach should be considered. Note that the findings are based on looking at the property sector as a group. If you want to draw any conclusion about individual property development companies, you should undertake a similar analysis for the individual company.


            The property sector is a cyclical one. To get an accurate picture of property development companies, you should look at the performance over the cycle. This requires you to be able to identify the cycle in real-time.
            The Malaysian House Price Index (HPI) is the best indicator when it comes to using the metrics to gauge the performance of the Malaysian Property sector. When using this metric, it really does not matter whether you use the trendlines or the % annual changes.  In real-time, it may not be very clear where you are in the cycle. As such I recommend that you complement the HPI with the Residential Starts.
            To identify the starting point and ending point of a cycle, you chart the metrics. The values of the metrics are on the y-axis and time is on the x-axis. You then look at the pattern to identify the waveform.
            Disclaimer: The author is not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned here may not be suitable for you and you should have your own independent decision regarding them.
            This article was originally published as How to identify property cycles for equity investment opportunities by and is written by Dato Eu Hong Chew.
            Disclaimer: The information is provided for general information only. Malaysia Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.

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