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The effect of INFLATION on housing prices


Money as we know it has evolved considerably over the years, the idea of a currency stemmed from the barter system when people begin to trade excess goods with one another. For example, a fisherman would trade his extra catch with a farmer who has wheat to spare.

How inflation came about

This system has a distinct limitation though, it does not work when there is a clash in wants; e.g the farmer might want fish, but the fisherman does not want wheat and is demanding butter instead.

This roadblock led on to the birth of commodity money, which is defined as objects widely accepted as a medium of trade and is recognised by all (in a specific area) as a currency. These objects have value in themselves as well as value in their use as money. The first forms of commodity money included livestock, salt and shells.

But then, people found it difficult to divide these commodities equally and they do not really last – one cannot divide a cow equally into two or three part and salt could dissolve easily, hence one cannot hold onto it for long.

After some time, these monies were then replaced with more solid objects, i.e precious metals such as gold and silver.

Governing authorities began minting coins out of gold whose value was determined by weight. Over time, some parties figured out that by utilizing less gold for that same coin, they will be able to create more money. Hence, began inflation which is loosely defined as the hand-in hand occurrence of a general increase in prices and fall in the purchasing value of money.

When the amount of existing gold remains unchanged but the numeric value of currency increases, the value of said currency will drop. This is a classic case of more is not necessarily better – the dilution of an asset will only result in a depreciation in value.

An example of such an incident occurred in 1931 when Great Britain abolished the gold standards and the whole world followed suit. By unpegging the pound to gold, Great Britain gained full control over the printing of money. Now the value of currency is no more dependent on something tangible but instead relies on the supply and demand of money.

The idea of money has further evolved in recent years – in this digital age, we even have virtual monies where money could be wired or transferred easily online. These days, money supply is controlled by a central bank’s monetary policies which include the adjusting of reserve requirements, interest rates, government bonds, and so on.

What is the correlation between the value of money & home prices?

It can be said that whenever there is an increase in the supply of one good (money) but a constant limited supply of another good (homes), the latter will definitely be more valuable than the former, thus pushing up the prices of homes even more.

This theory applies when we take into account the local housing market’s current status quo – it is not as though home prices have escalated drastically in the past decade, it is mainly because the value of our currency has been on the downtrend.

It is no surprise that Bank Negara Malaysia (BNM) 2016 report states that the compound annual growth rate (CAGR) for home prices between 2012- 2014 (17.6%) was 2.5 times more than the GAGR recorded in the 2007-2009 period (5.1%).

On the other hand, the real value of residential properties has continued to increase as we have a limited amount of land. Land scarcity coupled with the growing population further aggravates the demand for housing.

From 1999 to 2016, we have seen our 1 M3 money supply, also known as broad money, increasing by 304% while housing prices more than doubled, prices increased 160%. Malaysia’s Housing Price Index (HPI) for Q42016 stood at 243.3 (base-year 2000). However, when adjusted against the Consumer Price Index (CPI), this figure dropped to 176.6.

It is interesting to note that the HPI has barely doubled in 16 years its values when adjusted for CPI, it has not exceeded 20% in appreciation from 1999 to 2008. In fact, the adjusted HPI experienced a drop in value in 2008; it was only in the past 7 years have the adjusted HPI seen a more aggressive rise in values.


Increasing the supply of money is not without its consequences; someone will have to bear the cost of this phenomenon.

There is a cost for holding money, as the saying goes, “a dollar today is worth more than a dollar tomorrow”. Hence why many look for ways to hedge against inflation; some buy properties, some purchase stocks or bonds while others place their cash in Fixed Deposit accounts.

All these activities mean while further push up the prices of said investments. Nevertheless, inflation is not totally a bad thing, it is necessary for the stimulation of the economy. Zero or negative inflation (deflation) can lead to a depressed economy. When the real value of money increases, people tend to hold onto their money and restrict their spending. And a stagnant economy will cause a decrease in prices, which domino effects would be a decrease in production and consequently higher unemployment.


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