Housing supply and demand – are we nearing equilibrium?

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REALTY CHECK By DATUK ABDUL RAHIM RAHMAN

Is there any equilibrium point in housing market, considering the many factors influencing demand and supply?

The main determinants of the demand for housing are demographic. Population size and population growth are the core demographic variables. However, family size, the age composition of the family, the number of children, net migration, non-family household formation, the number of double family households, death rates, divorce rates, and marriages are other demographic variables that would influence demand for housing. Other factors such as household income, price of housing, cost, availability of credit, consumer preferences, investor preferences, price of substitutes and price of complements all play a role in determining demand for housing.

Income is an important determinant of demand as shown by a study conducted by De Leeuw in 1971 that showed positive income elasticity of demand in North America ranging from 0.5 to 0.9, meaning the market demand for housing grew as real income rose. The price of housing is also an important variable influencing demand for housing, where in terms of elasticity just like any normal goods it is negative increase in price will result in decrease in demand.

As for supply, the quantity of incoming supply is typically influenced by cost, price of existing stock of houses, and the technology used in the construction, where material costs tend to contribute the largest share of the construction cost, about 30% to 40%. In the short run, supply tends to be very price inelastic increase in cost will have less effect on supply. However, over a longer period, it tends to be very price elastic increase in cost will lower supply.

A study conducted by Fallis in 1985 showed price elasticity of supply was estimated at 8.2, indicating increased in cost would lower supply significantly. The degree of elasticity depends on the elasticity of substitution and supply restrictions. For example, the use of capital intensive technology has been employed to reduce the rising labour cost, thus having less impact on the supply of housing.

As at first half of 2011, Malaysia had 4,466,062 units of housing, an increase of 1.7% from the total of supply in the first half of 2010. About 24,709 units were completed in the first half of 2011, a lower number compared to 50,611 units completed in the first half of 2010. Kuala Lumpur and Selangor accounted for 6,567 units or 27% of the total new stock. Kuala Lumpur and Selangor had 414,436 and 1,285,192 homes, reflecting an increase of 2.0% and 1.7% respectively from the total as of first half of 2010.



Other states which showed significant number of units completed are Sarawak (2,612), Penang (2,507) and Perak (2,184). The incoming supply in the country was recorded at 560,636 units, where Selangor is the largest contributor (134,143 or 24% of the total) followed by Johor (76,429 or 14%) and Negri Sembilan (65,227). Kuala Lumpur has 39,656 units coming on stream.

In terms of transactions recorded as of first half of 2011 for the country, there were 133,984 transactions in the residential category, out of which the largest transacted numbers were priced in the range of RM100,000 to RM150,000, which accounted for 22,857 units, followed by units priced between RM250,000 and RM500,000, which accounted for 21,559 units.

Selangor recorded the highest number of transactions at 38,424 units, followed by Johor (15,015 units), Penang (13,832 units), and Kuala Lumpur (11,522 units). The most popular units transacted in Selangor, Kuala Lumpur, and Penang were for units priced between RM250,000 and RM500,000, while in Johor, the highest transactions recorded were for units priced between RM100,000 and RM150,000.

This brief analysis gives an indication that the total number of units coming into the market needs to be in line not only with the level of affordability of potential buyers in the area the projects are to be launched but also the demographics of Malaysian population.

As of July 2010, total population was estimated to be 28.25 million and the population is expected to grow at a rate of 2.4% per annum, where about 65% of the population is urban population. Today, less than 4% of Malaysians live in poverty and it is estimated that about 2.0% of the total urban population in Malaysia lives below the poverty line, earning monthly household income of equal or less than RM750. Low income households (earning income equal or less than RM2,000 per month) represents 75% of the median income in Malaysia.

The national average household income is estimated at RM4,000 per month. It should also be noted that about 65% of Malaysia's population is below the age of 35, thus there would definitely be strong demand for housing.

Due to continuous movement in the factors affecting supply and demand for housing, policy intervention is necessary to ensure that the majority of the population has equal access to own homes. Singapore's public housing policy is often cited as the most successful example of affordable housing provision in Asian cities. A study conducted in 2000 estimated that about 85% of the total population lived in public housing with nearly 95% of them owning the flats they occupied.

By centralising its public housing effort under a single authority, Housing Development Board, Singapore has circumvented the typical problems of duplication and fragmentation of duties, and bureaucratic rivalries associated with multi-agency implementation. This centralised function also serves as a mechanism to ensure supply and demand are checked.

It is hoped that the provision of affordable homes as announced in Budget 2012 would achieve its main objective of increasing home ownership among the majority of the population.

Senator Datuk Abdul Rahim Rahman is the executive chairman of Rahim & Co group of companies.

Appearances aside, not yet all at sea: US vs China!

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Appearances aside, not yet all at sea

Behind The Headlines By BUNN NAGARA

THE People’s Liberation Army (PLA) set up a new office to streamline its management last Tuesday, and this week the PLA Navy will conduct training in the Western Pacific.

Some of this may be China’s response to enhanced US manoeuvres in the region, although in declaring plans to station US troops in northern Australia, President Barack Obama said they were “not aimed against any country in particular”.

Beijing also described the sea exercises as “routine” and not aimed against any country in particular. How did it all begin?

In Tokyo, Hanoi and Manila, China’s recent postures over disputed maritime territory have made a renewal of US “commitment” to the region timely.

However, Beijing sees recent US moves in Vietnam and the Philippines, following alliance-building in Japan, Australia and India, as provocative encirclement.

China’s moves are then regarded as justified reaction. Only the type and degree of reaction are being debated in Beijing.

China is neither anxious nor impatient to respond to US moves. Any change in Chinese foreign policy or naval deployment would take time through party-government-military hierarchies, and present circumstances discourage it.

The US is heading into a presidential election, with China itself readying for leadership changes next year. Beijing wants to avoid being sidetracked or becoming a US election issue.

The atmosphere of mutual US-China suspicion has developed so keenly as to make caveats necessary. In announcing diplomatic initiatives in Myanmar, Washington said they were not meant to isolate Myanmar’s long-time ally China.

But US attempts at alliance-building have seen patchy results. South Korea’s right-wing President Lee Myung-bak has not agreed to just about any US proposal to counter China’s rise.



Seoul is unimpressed by Obama’s trade grouping, the Trans-Pacific Partnership (TPP), a discreet alliance that excludes China. Australia is in this effort to draw a dividing line down the Pacific but not Japan, since the latter already hosts US troops and has military ties with the US.

For the TPP to exclude the second and third largest economies in the world shows its main concern cannot be trade. And for the US to dominate the TPP’s membership reveals its unilateral nature.

South Korea is unsympathetic to the TPP since it already has problems domestically in ratifying a Free Trade Agreement with the US. However much some countries may agree ideologically, national interests come first.

The same applies to the US in the UN Convention on the Law of the Sea (UNCLOS), which Washington has signed but refused to ratify. The US here is in the company of a handful of countries like Afghanistan, Bhutan, Burundi, North Korea, Iran, Libya and Rwanda.

A total of 161 countries, including China, have signed and ratified the Law of the Sea treaty covering the rights and responsibilities of nations at sea, from issues like navigation to pollution. China is particularly irked when the US lectures it on how to behave at sea.

China’s latest overtures have been attractive offers: US$10bil (RM319.7bil) in trade credits for Asean, US$3bil (RM9.6bil) for a new maritime cooperation fund, and efforts to boost two-way trade to US$400bil (RM1.3 trillion) this year alone.

Last Wednesday, Japan’s Foreign Minister visited Beijing, and the next day both countries jointly announced a commitment to build stronger ties. Japanese Prime Minister Yoshihiko Noda will visit China next year to mark the 40th anniversary of normalised relations.

In foreign policy, China is at a promising crossroads. This establishment has long been a small elite, founded largely on the Standing Committee Politburo of the Communist Party and the Central Military Commission, yet whose composition has been somewhat messy.

But that establishment is now more open than before, with more inputs from other actors such as diplomats, scholars, policy researchers, media, major state corporations and local governments. The Foreign Ministry may be heralding the opening of a new China, provided that foreign provocations do not force a reversal.

Current US strategy on China is multi-pronged, which Secretary of State Hillary Clinton calls “smart power”: an opportune combination of “hard” and “soft” power as coined by Harvard’s Joseph Nye.

Hard power concerns traditional power like military forces, whereas soft power covers cultural issues like mass entertainment, Peace Corps volunteers and institutions like the TPP and the Proliferation Security Initiative (PSI).

The “hard” and “soft” concepts are analogous to Chinese kung fu, whose written records of these styles go back at least 2,500 years. So China already has a head start on that.

And in kung fu, the soft style may be less obvious but more sophisticated and effective.

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The role that the US plays in Asia: Containment of China!

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The role that the US plays in Asia: Containment of China!

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The role that the US plays in Asia

Comment by XUE LITAI

SINO-US ties were in focus at the recent Asia-Pacific Economic Cooperation (Apec) summit in Honolulu and the just concluded East Asia Summit (EAS) in Bali, especially because of the European economic and political crises.

It was not a good time for US President Barack Obama to attend the EAS, given the unstable state of the American economy, and the Congressional super committee’s failure on the federal budget.

The frictions between the United States and China – from the yuan’s exchange rate to the South China Sea disputes – are nothing new. But the problem now is that the two countries seem unable to narrow their perception gap.

Obama met with Premier Wen Jiabao twice during the EAS to say that China should allow the yuan to revalue more rapidly.

At the Apec summit in Hononulu, Obama had complained to President Hu Jintao that the yuan was undervalued and said it “disadvantages American business; it disadvantages American workers. And we have said to them that this is something that has to change”.

The Chinese leaders responded that the yuan’s exchange rate was not responsible for the US’ high trade deficit with China, instead structural problems in the American economy were to blame for that.

In fact, China has been emphasising the need for a new mechanism for global economic governance to increase “the voice of emerging markets and developing economies”.

Before the summits, US officials had said countries concerned should exercise self-restraint and refrain from taking any action that could escalate or complicate the territorial disputes in the South China Sea. The US remark was directed at China, too.

But before that, Obama had issued an indirect message to China saying: “We want you to play by the rules.”

He warned that “where we see rules being broken, we’ll speak out and, in some cases, we will take action.”

Chinese leaders and people, however, think that the US dragged the South China Sea disputes, an irrelevant issue, to the EAS to fulfil its own agenda.



To them, the US’ intention is clear: It is using the South China Sea disputes to drive a wedge between China and some of its South-East Asian neighbours, which have enjoyed “20 years of steady friendship”.

It is clear that the US is desperate to engage full-time and establish its diversified presence in Asia as part of its global repositioning strategy. Washington is in the process of one of the most important transitions, that is, repositioning and rebalancing its foreign policy priorities.

To that end, it has begun shifting its resources and capabilities from the Middle East and South Asia to East Asia. Recognising that the “American future is in Asia”, the US is hell-bent on establishing a strong presence in Asia.

In the 21st century, as US Secretary of State Hillary Clinton has said, the world’s strategic and economic centre of gravity “will be Asia Pacific”. Clinton said that with the withdrawal of American forces from Iraq and Afghanistan, the US had reached a “pivot point” that should allow it to “lock in a substantially increased investment – diplomatic, economic, strategic and otherwise – in this region”.

Obama soon underscored the shift by stressing: “There is no region in the world that we consider more vital than the Asia-Pacific region; we are going to prioritise this region.”

Such a strategic calculus makes US-China ties the most important and complex relationship Washington has ever established. Thus, the US has to have constructive engagement with China.

But simultaneously, some senior US officials also consider it necessary to continue their China-containment policy. As a result, the US is using the South China Sea disputes to prevent China’s influence from advancing southward
.
Actually, Obama’s decision to attend the EAS is symbolic of Washington’s policy shift towards Asia. In other words, the US’ purpose was to use the EAS to reduce China’s influence in the region.

The Obama administration has demonstrated the US’ established policy on containment of China over the past two years.

Once, Obama even declared: “We’ve brought more enforcement actions against China over the last couple of years than had taken place in many of the preceding years.”

Probably, his declaration was aimed partly at the strategic calculations mentioned above and partly to blunt criticism of his administration by trade unions and Republican rivals, who could accuse him of not taking tougher action against China in the run-up to next year’s presidential election.

The US’ focus on Trans-Pacific Partnership could be interpreted as part of its economic strategy to compete with China’s increasing influence in the region.

In response, China has announced that it would offer its South-East Asian neighbours US$10bil (RM31.8bil) in infrastructure loans and establish a three billion yuan (RM1.5bil) fund to accelerate maritime cooperation with Asean member states.

Among the areas covered by the fund are marine research, navigation safety and combating transnational crimes. Asean member states now look to China for economic revitalisation and seek security guarantee from the US.

But such is the triangular US-China-Asean ties that only after the US and China reach greater agreement over Asia-Pacific affairs can Asean member states overcome the dilemma of choice. — China Daily/Asia News Network

> The author is a research associate at the Center for International Security and Cooperation at Stanford University in California, US.

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