Danger of dip in demand lurks

An ageing population can lead to a sluggish market for homes and everything else.

RECENTLY, the Urban Wellbeing, Housing and Local Government Ministry proposed allowing housing developers to extend loans to homebuyers. One common refrain in support of this policy and for house buying in general is that “house prices only go up”.

In one sense, this is rational. Land is the biggest single input into house prices and land isn’t being made anymore (bar the occasional land reclamation or undersea volcano eruption). Global warming is raising sea levels, which reduces available land even further. But this is entirely a supply side argument.

Historically, there have been periods where house prices have not gone up or even gone into retreat. There is nothing inherently special about the housing market in that respect. The global financial crisis was partly triggered by a US housing bubble that burst, as house prices fell over 20% from their peak in 2007 and took eight years to recover.

Europe saw much of the same trend, with Spain and Ireland seeing house prices retreating in excess of 30%. The earlier crash of Japan’s 1980s bubble saw prices dropping 10% to 15% in major cities and not recovering for decades.

Closer to home, house prices barely kept pace with inflation in the decade after the Asian Financial Crisis, which started in 1997. Highrise properties performed the worst, with price increases actually below the inflation rate. It was only after 2009 that house prices took off across all segments.

Just as with economic growth, we need to examine the underlying demand and supply factors. And just as with economic growth, house prices will not always increase.

Why did house prices behave as they did in Malaysia? On the supply side, new houses were being built at a rate of 200,000 a year in the early 2000s, but fell to an average of under 130,000 from 2008 to 2014. Only in 2015 did housing stock increase at the same rate as earlier.

On the demand side, Malaysia’s demographic profile shows that potential demand from first-time buyers is peaking. The largest age cohort in Malaysia’s population is currently 20-24, at an estimated 2.9 million individuals.

In fact, there’s a bit of a bulge in the population numbers at ages 35 and below, essentially when people start looking to buy a home. Coupled with historically low borrowing rates, this boosted demand at a time when the supply of new homes was lower across the board and not just in the “affordable” segment.

Take both demand and supply factors in consideration. It should not be a surprise that house prices have risen faster than inflation or incomes. But what about the future? The supply of affordable homes is becoming a hot topic and while progress has been slow, the industry and authorities are beginning to get on top of the problem.

The interesting thing is what will happen on the demand side. As stated previously, the largest age cohorts in Malaysia are between 25 and 35, and succeeding cohorts are progressively smaller.

In other words, Malaysia experienced a baby boom starting around the 1980s, and in some ways this will be Malaysia’s “golden” generation. Slowing population growth and the ageing population imply that there will be reduced future growth in demand for pretty much everything.

So, what will likely happen is that demand for new housing will slowly taper off. Subject to supply constraints, that means upward pressure on house prices will also taper off. That’s good news for new homebuyers. The bad news will come later.

One interesting thing about house price booms in other countries is the concurrence between generational change and house prices. The crash in house prices in the United States and Europe coincided with the beginning of retirement for their baby boomers born after World War II. Japan’s bubble crash in the early 1990s coincided with a dramatic slowdown in its population growth.

While demographic change isn’t the only or most important reason for these house price declines, it is a contributory factor. Housing is the single largest investment most families make and the biggest single repository of their wealth. For a large portion of the global population, it is the only wealth they have.

One common strategy for retirement is to withdraw the equity in a home and use that to fund retirement, which is a fancy way of saying “Sell your house and buy a cheaper one”, using the difference for day-today expenses.

In a world where family support systems are breaking down and “empty nest” syndrome is more widespread, housing as a retirement vehicle takes on greater importance.

This is fine if latent demand for housing is sustained. But with age cohorts of different sizes, the implication for baby boomers is that upon retirement, they will try to withdraw housing equity in the face of declining housing demand, as the age cohorts behind them will be smaller.

This will happen in Malaysia between 2040 and 2050, when the generation born beginning in 1980 starts to retire.

Not all countries face house price crashes. But those that don’t generally have low levels of home ownership and extensive social safety nets, reducing the necessity of using housing as a retirement vehicle.

In Malaysia, we are culturally programmed to think that home ownership is desirable, and we don’t have a comprehensive social protection system.

While I wouldn’t predict a housing bust in 25 years, I believe the potential is there. The important thing to remember is that we should never forget economic principles, and we ignore them at our peril.