Abstract
The novelty of this paper is to ascertain a nonlinear relationship between housing supply and house price. This study is conducted based on panel dataset of four different types of houses in Malaysia from 2002Q3 through 2016Q4. Although housing supply has been theoretically assumed to be positively and linearly related to house price, we observed that the number of new houses build in Malaysia has declined despite the increasing house prices. Hence, we posit that housing supply and house price are nonlinearly related. The results from pooled mean group estimation show the existence of inverted U-shaped housing supply curve. The threshold level of house price index is found at 186.92 where the effect of house price on housing starts will become negative after this point. We also find that the marginal effects of house price evaluated at the minimum and maximum levels are positive and negative, respectively, and statistically significant. This paper suggests that the squared term of house price should be included in estimating housing supply in Malaysia. The evidence of inverted U-shaped housing supply curve in Malaysia shows that housing authorities have taken steps to overcome the challenges of oversupply by reducing the approvals for housing development projects.
Highlights
Housing development is a critical determinant of economic growth of a country (Lee & Jin, 2011; Alkay et al, 2018)
In view of the above discussions, we argue that house price and new housing supply interact in a nonlinear manner
While existing empirical studies linearly regresses housing starts on house price and other variables, we aim to demonstrate that there are good evidence for believing that the new housing supply will not increase infinitely in relation with house price but it will decline when house price increases above a threshold level
Summary
Housing development is a critical determinant of economic growth of a country (Lee & Jin, 2011; Alkay et al, 2018). A decreased trend of housing supply has been evidenced despite a growth of house price. In Malaysia, the number of housing starts has fallen from a high of 188,757 units in 2015 to 121,326 units in 2016, a drop of 35.7%. The high-rise housing starts have dropped the most by over half from its peak of 109,057 units to 47,855 units during this period. The above observation contradicts with economic theory that predicts housing supply should be positively related to house price. A rising house price is a positive indicator of housing supply
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