House price diffusions across three urban areas in Malaysia

Abstract

PurposeVarious empirical studies have demonstrated that house prices in different geographic regions have a tendency to co‐move. But these studies have focused on developed economies in the west. The purpose of this paper is to test this hypothesis in the case of three major urban areas in the rapidly developing economy of Malaysia, namely Klang Valley, Penang and Johor.Design/methodology/approachUsing Pesaran et al.'s bounds testing approach to cointegration and Granger non‐causality analysis, the short‐run and long‐run dynamics of regional house prices are analysed.FindingsFirst, house prices in all three regions appear to be cointegrated. Second, there is evidence of short‐run bi‐directional causality between house prices in all regions. Third, long‐run house price movements in Johor are not Granger‐caused by house prices in Klang Valley and Penang. This observation could be rationalised in the light of the argument that Johor house values may be more closely aligned with activities in the Singaporean economy, given the region's geographic proximity to Singapore.Practical implicationsThe findings have several practical implications for housing investors who intend to optimise investment decisions on housing purchases. The understanding of the nature of regional house dynamics could also enrich the government's knowledge of how the local housing markets work and enable the design and implementation of relevant housing policies.Originality/valueThis is the first known study that establishes stylised facts of lead‐lag relationships for regional house prices, while also providing short‐run and long‐run estimates of regional house price interactions for Malaysia.