Abstract
The Malaysian housing market and associated housing finance system have expanded significantly as a result of rapid urbanisation since the late 1980s. The key aspect of this paper is to analyse the inter-relationship between the housing market and housing finance system in Malaysia. The paper employs Vector Autoregressive approach and Granger Causality test to empirically investigate this inter-relationship. In Malaysia, no housing studies has actually looked into or used this approach to identify the inter-relationship between these two elements. The key findings show that there is a strong inter-relationship between the housing market and housing finance system. The direction of causality shows that there is a bi-directional relationship between the housing market and housing finance system. These inter-relationships provide evidence that sound performance of the sub-markets within the housing finance system is a determinant prerequisite of the robustness of the housing finance system, if a healthy performance of the housing market is to be achieved.
Highlights
Housing often exemplifies the largest single investment item of individuals
The lead-lag relationship shows that the highest explanatory power of changes in the present house price was the previous changes in the house price itself lagged by two years, the primary and secondary mortgage markets lagged a year and the capital market lagged by four years
Within the housing finance system, changes in the present house price were determined by the present changes in the primary mortgage market and the secondary mortgage market and the capital market lagged by four years
Summary
Housing often exemplifies the largest single investment item of individuals. This is normal especially as family incomes rise and housing is viewed as a key to a safe future rather than a basic consumption. The selective control of credit in rapid monetary expansion can provide a temporary relief to the housing and finance markets In this respect, it appears that many financial institutions in the country still have a sizeable capacity in providing such loans in the market. The housing finance system plays a central role in the housing market as the willingness and capacity of the financial institutions to lend tends to boost house prices For such relationship, an increase in the price of housing may increase the supply of credit to the housing market, or vice versa. The main discussion is to examine the housing market and the housing finance system in Malaysia, in order to provide the context concerning the development and operation of both markets. Thereafter, summary and conclusions based on empirical modelling are discussed
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