Housing bubble in Penang prediction and determinants

Abstract

House prices in Malaysian cities increased drastically in the past few years, notably in the state of Penang. The existence of a housing bubble is speculated by major property players. This paper ascertains whether a housing bubble exists in Penang and explores the long-run and short-run determinants of Penang residential prices. Quarterly data (2000Q1 to 2012Q2) of House Price Index is the dependent variable and Gross Domestic Product, Consumer Price Index (CPI), Base Lending Rate (BLR) and Housing Supply as independent variables. Econometric model together with fully modified Ordinary Least Squares regression were used to detect the presence of housing bubble in Penang. The determinants of Penang house prices are based on Granger causality and variance decomposition analysis using the vector autoregressive (VAR) model. The results show no evidence of housing bubble in Penang housing market. CPI has both long-run and short run causality relationship with house prices while CPI and BLR explain a large part of housing price variance. Results show changes in inflation and cost of borrowing will greatly affect Penang house prices