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THE DYNAMICS OF HOUSE PRICE VOLATILITY IN MALAYSIA

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 Journal of Technology Management and Business (ISSN: 2289-7224)
Vol 03, No 02, 2016

THE DYNAMICS OF HOUSE PRICE VOLATILITY IN MALAYSIA

Tan Ai Reen1, Muhammad Najib Razali2

Universiti Teknologi Malaysia

*Corresponding E-mail : [email protected]

Abstract

The purpose of this study is to examine the house price volatility in three urban areas in Malaysia. This
empirical study covers a sample period of 9 years from 2005 Q1 to 2013 Q4. The volatility of the
Malaysian housing market and its determinants were investigated. The determinants for house price
volatility were found through content analysis and ARCH model. An Autoregressive Conditional
Heteroscedasticity (ARCH) model was employed in this study to examine the volatility of house prices of
three Malaysian main urban areas. The Engle LM test was also utilized to analyze the volatility clustering
effects in these provinces. This study found that there are evidence of volatility clustering in more than
half of the housing in Malaysia. The significant determinants for the house price volatility in Malaysia are
BLR, GDP, housing stock and inflation rate. This study has implications for policy and decision makers
as they have to take into consideration house price volatility when drawing up policies and making
investment decisions. Besides, the changes in house price volatility determinants will also affect the
housing market. Therefore, the determinants are important in the formulation of housing policy. The
limitations for this study are time constraint and the quality of the data. This paper is probably one of the
few studies undertaken to examine house price volatility in Malaysia.

Keywords: House, price, volatility, Malaysia

1.0 Introduction

According to Banks et al. (2010), housing is the biggest marketable asset in a household portfolio
for most people. For example, in the United States, equity in housing is a major component of the
household wealth. Homeowners generated household wealth through capital gains over house prices.
Most of the households in the United States, anticipate using their equity in housing to finance the second
half of their life. However, Mankiw and Weil (1989), Hoynes and McFadden (1994) urged that the
substantial decline in house prices in the coming decades will result in capital losses for the homeowners.
Therefore, the changes in house prices will influence the household wealth. In the long run, house prices
have sustained growth in the housing market and its recurrent fluctuation along the growth path has been
a normal phenomenon globally. According to Mankiw and Weil (1989), the changes in demography will
lead to predictable changes in the demand for housing which will have a substantial impact on the price of
housing. However, an econometric analysis suggests that real income, relative prices and real interest
rates are also important factors which will determine demand. From this analysis, it can be viewed that
house prices have a backward and forward linkage with the housing market.

House price volatility has drawn the attention of policy makers and investors in the recent market.
Volatility is significantly related to lagged information or “news”. When investors are uninformed and
oblivious to the state of the market, their decision making will be via their gut feeling or speculation
which imminently results in price fluctuation. Lagged error happened when bad news occurred. Risk to
house price may be a consequence of excess volatility. Whenever there is any new information in the
market, house price will be volatile. As a result of public demand on properties, the price movement of

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housing relative to other goods and services is larger. House prices are much more volatile than goods
prices, and real house prices are much more volatile than real incomes. House price has the linkage with
the macroeconomic fundamental factors such as, population, real income, unemployment rate, inflation
rate and change in house price itself. It is important to determine the factors of house price in order to
predict the movement of house price. Therefore, this study is an attempt to clarify the house price
volatility and its determinants in Malaysia. However, the main reason in conducting this study is due to
the lack of knowledge on house prices volatility in Malaysia. In order to measure the volatility of house
prices in Malaysia, a time-series data on house price trend has to be identified. The determinants of house
prices volatility is an important study in order to examine the significance of house prices volatility in
Malaysia. The research was done based on the following two questions which were derived from the
justifications given above:

i. What is the significance of house price volatility in Malaysia?

ii. What are the determinants of house price volatility in Malaysia

Previous studies carried out in developed countries have shown the significance of house price
volatility to the housing market. Generally, this study will solely examine the significance of house price
volatility in Malaysia. By implication, this study will benefit investors and policy makers; investors
would be able to estimate the condition of the housing market in respect to the house price volatility
before they make an investment decision. Besides, policy makers should also take into account the
importance of house price volatility in formulating the house policy. The housing market in Malaysia has
been performing well since its independence from the British. The performance of housing market in
Malaysia is mainly based on the residential property market. Since residential property is the strong
backbone in the Malaysian property market, any change in house prices will greatly impact the property
market and hence the Malaysian economy. A few researches on the volatility in house prices had been
done in the more advanced countries such as, the United States and the United Kingdom. Comparatively,
there is limited literature on house price volatility in Malaysia except for the literature by Zainuddin
(1994) which touched on house price volatility in Malaysia. As Malaysia experience dynamic
movements in the property market, particularly in the residential property sector, the various determinants
has also evolved. Thus, the aim of this study is to identify the house price volatility and its determinants
in Malaysia.

2.0 Literature Review

The significance of house price volatility has been studied by several researchers in other countries
particularly in developed countries, however there are few evidence of the study ever being done in
developing countries which includes Malaysia. For instance, the house volatility of eight capital cities in
Australia and its determinants were investigated by Lee (2009). He found that volatility-clustering effects
were found in these cities. Furthermore, the result from the EGARCH model shows that the determinants
of house volatility vary from city to city. Zhu et al. (2011), models the correlated shocks across regional
housing markets and found that the extra volatility could be caused by shocks in other regions. The study
of house price behavior, Björk (2013), suggests that research about house price conditional variance
should be concentrated on the volatility of several fundamental variables. Furthermore, Chen & Patel
(1998) investigated on house price volatility and granger causality relationship between house price and
its determinants in Taipei. The result has revealed several determinants such as, construction cost, interest
rate, total household permanent income, house completion and stock price index; this exhibited a long-run
equilibrium relationship with the house price. Researchers also found various types of volatility in the
housing market. One of the studies from Tsai & Chen (2009) on house prices, used the UK nationwide
house price data over the period of Q4 1955 to Q4 2005. The study had identified the asymmetry of
volatility. On the other hand, Miller & Peng (2004) also demonstrated that 17 % of the metropolitan

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statistical areas in the US has volatility clustering effect. In addition according to Abate and Anelin
(2016) house price volatility also creates risk of unsustainability house price for lenders. They added, an
increase in house price volatility increases the probability of negative home equity, and mortgage
foreclosure losses become worse. Volatility in house price is very important to assess, as it will bring
residential property market become unstable. This has been proving from the earlier study by Case et al.
(2003). Their study revealed that the related issue of housing market volatility and risk become one of
increasing prominence following problems in the US sub-prime mortgage market. House price volatility
can have detrimental effects on the economy, including negative equity nad mortgage foreclosures losses,
the safety and integrity of housing investment and associated mortgage lending is an area of generally
growing concern given the worldwide repercussion of sub-prime mortgage problems (Morley and
Thomas, 2016). The impact from GFC which started from sub-prime mortgage crisis has alert global real
estate market on the house price volatility.

Over the years, the movement of house prices has been a huge concern within the housing market
and had been widely researched according to the literatures. Movement of house prices is significantly
related to the supply and demand of housing stocks in the market. According to Mankiw & Weil (1989),
the fluctuations in demand have a substantial impact on the price of house. They suggest that the demand
of house is affected by the demographic changes. However, Swan (1995) argues that Mankiw-Weil
predictions of house prices are misinterpreted. According to Swan (1995), the prediction of future
movements in house prices should also take into consideration, information on the supply factors in
addition to relevant demand variables. House prices are usually described by fluctuations around a
function of fundamental variables in the economy (Björk, 2013). It has been a normal phenomenon that
house prices fluctuates recurrently in a time-series. However, large fluctuations of house prices are likely
to cause problems in the property market. Declines in house prices will result in capital losses for the
homeowners (Feinstein & Mcfadden, 1989; Mankiw & Weil, 1989). However, if households are able to
anticipate house price changes, potential losses may be mitigated.

Volatility is used to commonly refer to the amount of uncertainty or risk in a given security or
market index. It is about the size of changes in a series of value. Within the financial markets, investors
are increasingly concern with house price volatility. Large changes in volatility and its market returns will
have a negative impact on risk averse investors. It can have important effects on capital investment,
consumption, and other business cycle variables (Schwert, 1989). Volatility has been widely studied in
the financial context. The rate of return in the stock markets, bond markets or foreign currency exchange
market is volatile due to their high risk and liquid trading volume. According to Andersen and Bollerslev
(1996), volatility is computed as the sum of high-frequency absolute returns. Besides, Cotter (2005) also
says that absolute return volatility provides accurate measures of volatility. Therefore, the frequency of
returns is referred to as volatility. Volatility is caused by the activities in the market. Unexpected high
market activity will cause an increase in volatility and will widen the spread of volatility. Any
announcement in the news on the state of the market can affect volatility. Unscheduled announcements
can cause a rise in volatility depending on whether it is a public or private announcement. For scheduled
announcements, speculative trades during the pre-announcement period will lead to an increase in
volatility (Bauwens et al., 2005). The arrival of new information will lead the investors to trade
simultaneously in the same direction which will cause the large price changes (Schwert, 1990). The
volatility in stock market is generally caused by the new information in the market. Volatility is also
caused by the economy health and changes in policy. According to Schwert (1989), any financial leverage
increase during recessions will cause an increase in the volatility of leveraged stocks. Other than the
economic condition, changes in policy also has implications for volatility. Investors will use the
information of program trading to reflect new information and rebalance their portfolios. Thus, many
studies have been conducted in order to understand how prices behave in a highly liquid securities
market.

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Despite the fact that there were extensive studies on volatility in the financial literature, in the
context of house prices, very few studies were undertaken. A few researchers have studied the behavior of
volatility. According to Hott (2012), fluctuations can possibly be explained by the herding behavior
among house investors. Hott (2012) demonstrates that, in a stable economic environment with low
interest rates, people start to believe that, that is when it is a good time to invest in housing. As a
consequence of this type of behavior, house price increases much more than its fundamental price. The
study suggests that the variance of growth rate of actual house prices is six times higher than the
fundamental prices. It is proven that buyers and sellers’ decisions could make a huge impact on changes
in house prices. According to (Roche, 2001), emerging with the volatility of house prices, an increase in
house prices attracts more speculative investment demand with the expectation of further price increase.
Extensive literature on speculation in the housing market was carried out. Evidence of speculative
behavior was found by Shiller (1990), Abraham & Hendershott (1996) and Muellbauer & Murphy (1997).

Another study that investigates the impact of volatility in house price to residential property market
is done by Willcocks (2010) explored on variances in regional house prices using time series processes
commonly employed in financial market research. Campbell et al. (2009) studies on housing markets and
traditional financial markets by using dynamic growth model to assess rent-price ratio on housing market
in US. Furthermore, house price volatility also creates of unsustainable house price for lender; negative
home equity and mortgage foreclosure losses become worse (Abate and Anselin, 2016). Therefore, the
study on house price volatility is important as it will give significant impact to housing market which
consequently affect the country’s economy growth.

According to Shiller (1990), speculation appears to be a local phenomenon due to the difference
in perception towards house price across cities. This result is further discussed and supported by Abraham
& Hendershott (1996) where the lagged appreciation rate in the more volatile coastal cities appeared to
have larger coefficient which is twice that of the stable inland cities. Moreover, Muelbauer & Murphy
(1997) also found the presence of larger numbers of speculative traders in a volatile housing. Speculation
in the housing market mainly depends on the expected and current capital appreciation in housing. The
misrepresentation by investors might result in excess demand and lead to excessive house price changes.
In summary, any speculation in the housing market will raise uncertainty in house price increment in the
future.

The effect of house price volatility was found different with findings from the financial market.
Tsai & Chen (2009) found that when bad news is announced for property market, the lagged error is
negative and the variance will decrease. Shocks in the market will magnify volatility (Hossain & Latif,
2009). This could be explained by the behavior of speculative. Besides, the effect of negative shock is
long lasting compared to positive shocks. House price volatility is also believed to have forward and
backward linkage with the determinants. Variance Decomposition technique was carried out in several
studies to estimate the impulse response of the house prices to such shocks. Evidence of impulse response
was found in Hossain & Latif (2009), Chen & Patel (1998) and Lan & Zhang (2014). Given the close
relationship between macroeconomic factors and house price volatility, it is relatively important to
identify the significance of determinants to the housing market in order to make the right decision for
investment and policy. According to Banks (2010), housing is risky in some geographic markets with
high levels of house price uncertainty. When the house price is volatile, there is a lower probability of
moving. For those households who are looking to settle down, there is a greater influence in their mobility
decision to move to a less volatile housing area. Other than mobility, Li & Yao, (2007) presented the
effects of house price uncertainty on housing demand. The dimension of house price risk would affect a
household’s precautionary savings incentive and consumption rate. These studies proved that the
volatility of house price has a direct impact on the consumption and investment of housing market.

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3.0 Significant of Residential Property in Malaysia

Global House Price Index released by Knight Frank on 4th June 2014 showed the index rising by
0.6% compared to 1.2% last quarter. Although, there was a drop in the growth rate of house prices in the
first quarter of 2014, the house price index still recorded an annual growth of 7.1%. For the first time
since 2008, not a single country has had an annual price fall in excess of 10%. The recovery in the global
property market is becoming more entrenched. The Knight Frank Global House Price Index, shown in
Table 1, shows Malaysia ranked 15th, recording a price growth of 8% in the year ending March 2014. For
the first three months of 2014, Malaysia had recorded a price rise of 0.3%. It shows that Malaysia’s index
performance was strengthening in the first quarter of 2014.

Table 1 : Global House Price Index

12-month % change 6-month % change 3-month % change
Rank Country
(Q1 2013-Q1 2014) (Q3 2013-Q1 2014) (Q4 2013-Q1 2014)
1 Dubai 27.70% 14.30% 3.40%
2 China 17.50% 7.10% 2.00%
3 Estonia 16.20% 11.20% 5.00%
4 Turkey 13.80% 5.70% 2.90%
5 Taiwan 12.20% 3.50% 1.50%
6 Brazil2 12.10% 5.70% 2.10%
7 Australia 10.90% 5.60% 2.10%
8 Colombia 10.60% 3.60% 1.70%
9 United States 10.30% -0.20% 0.20%
10 Iceland 9.70% 4.30% 1.00%
11 New Zealand 9.20% 5.00% 3.10%
12 United Kingdom 9.10% 5.60% 2.60%
13 Indonesia 9.10% 4.40% 2.60%
14 Lithuania 8.40% 1.60% 7.40%
3
15 Malaysia 8.00% 0.80% 0.30%
16 Ireland 7.80% 1.30% -1.30%
17 Luxembourg 7.80% 3.10% 2.70%
18 Israel 7.20% 3.50% 2.80%
19 South Africa 7.00% 6.00% 3.10%
20 Malta 6.40% 6.40% 4.30%
21 Germany 5.80% 2.20% 0.00%
22 Latvia 5.50% 3.60% 2.40%
23 Mexico 5.00% 1.80% 1.70%
24 Canada 4.60% 0.80% 0.70%
25 Sweden 4.50% 1.40% 0.50%
26 Austria 4.10% 1.30% 1.80%

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27 India 3.40% 3.40% 2.40%

28 Hong Kong3 2.80% -0.60% -0.40%
29 Poland 2.70% 3.90% -2.30%
30 Denmark 2.50% -0.70% -0.20%
1 2
Notes: Based on Beijing & Shanghai Asking prices 3 Provisional data 4 Island-wide price index for non-landed
properties
(Sources: Knight Frank Residential Research, 2014)

Property markets in Malaysia are grouped as follows: residential, commercial, industrial,

agriculture, resort and hotels, and plant and machinery. Among these property types, residential property
market has the highest recorded transaction volume annually. Table 2, shows the volume of residential
property transaction and the percentage shares of residential market, from the total property market in
Malaysia from 1996 to 2012. The table also shows, that over the years, the percentage of residential
property transactions in the market has been inconsistent with fluctuation. It proves that the housing
market is the backbone of the property market in Malaysia.

Table 2 : Percentage of Residential Transactions from Total Property Transaction in Volume in Malaysia
(1996-2012)
Total Property Transaction Residential Property Transaction % of Residential from total
Year (in volume) (in volume) property market

1996 270,538 170,007 62.84%

1997 274,749 175,644 63.93%
1998 186,077 122,881 66.04%
1999 225,901 157,082 69.54%
2000 240,068 170,932 71.20%
2001 242,634 176,208 72.62%
2002 231,394 162,269 70.13%
2003 243,376 164,723 67.68%
2004 293,212 195,243 66.59%
2005 276,508 181,762 65.73%
2006 283,897 182,555 64.30%
2007 309,455 199,482 64.46%
2008 340,240 216,703 63.69%
2009 338,089 211,653 62.60%
2010 376,607 226,874 60.24%
2011 430,403 269,789 62.68%
2012 427,520 272,669 63.78%
(Sources: JPPH, 1996-2012)
The real estate market in Malaysia has managed to recover from the recent Global Financial
Crisis due to the government’s economic policies. Since the Global Financial Crisis, Malaysia’s house
prices have risen impressively, especially, in the Klang Valley and Penang. The percentage of nominal

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and real house price changes is shown in Figure 1. From the figure, it shows that house price fluctuates,
and the disparity between nominal and real house price is inconsistent. The house price had experienced
huge negative change during the crisis year. It then recovered and continue to grow after the Global
Financial Crisis until it reached 7.29%, which is the highest house price index recorded at the end of
2012. In short, the Malaysian housing market had managed to recover from the impact of the Global
Financial crisis. The performance of Malaysia’s housing market has in fact improved as it ranked 15th in
the Global House Price Index. This improvement will attract more investment in the residential property
market in Malaysia, and this will subsequently contribute towards Malaysia’s economic growth.

According to Malpezzi & Wachter (2005), the factor affecting house price changes are the
interactions between the housing markets’ and the economic sectors’ cyclical changes in the property
market. According to Herring (2006), macroeconomic variables are believed to influence the movement
of house prices. The macroeconomic variables such as population growth, employment rate, interest rate,
inflation and income are contributors to the determinants of house price volatility. A research by Case
(1986) used the population growth, interest rate, income tax growth, employment growth and construction
cost to determine house prices in Boston. Case et al. (2003) demonstrates that the population, real income,
tax system, interest rate and the changes in house price itself have had some influence on the US house
prices. A similar result was reported by Himmelberg et al. (2005), where house prices in US are in line
with its macroeconomic fundamental factors. Jud and Winkler (2002) also found that population growth
rates, real changes in income, construction cost and interest rate are the significant factors for the house
price appreciation in the US. A more recent Australian study, by Abelson et al. (2005), had found
evidence that the unemployment rate, mortgage rate, equity prices and the housing stock has a negative
relationship with the Australian house prices, while income and consumer price index (CPI) has a positive
relationship in the long run market.

The housing supply factors consisting of land price, construction cost and the housing stock are
also factors influencing house prices (Malpezzi, 1999). Due to the lack of reliable techniques to examine
supply factors, and various restrictions imposed on supply factors such as land restrictions, and type of
houses, housing supply factors are seldom used by researchers (Malpezzi, 1999). The supply and demand
of housing does not reach equilibrium in the real market. Due to the complexity of the housing market,
many researchers prefer to use demand factors which influence house price. In the context of house price
volatility, Dolde & Tirtiroglu (2002) found that volatility of house price has significant associations with
economic conditions. Personal income growth, inflation and interest rates appeared to have stronger
relationship with the volatility event. According to Hossain & Latif (2009), GDP growth rate, home value
appreciation rate and the inflation rate happens to be the determinants of house price volatility in Canada.
However, Lee (2008) found that only inflation rate appeared to be the determinant of housing volatility at
the national level in Australia. Overall, most studies showed significant relationship between house price
and macroeconomic fundamental variables of income, interest rate, population, inflation and construction
cost. The data for construction cost is however, limited to Malaysia. Therefore, the housing stocks from
the supply side will replace construction cost. In summary, while there are extensive literatures on house
price determinants, little attention has been placed on the determinants of house price volatility.

4.0 Methodology

Based on the research objectives, data for house prices and the macroeconomic factors are essential
for this study. Several tests and models were exploited to determine the house price volatility and its
determinants in this chapter; these include the Pearson Correlation Analysis, Langrange Multiplier (LM)
test and Autoregressive Conditional Heteoskedasticity (ARCH) model. This section will explain in detail
the design of the research, the data and the data analysis methods used in achieving the objectives of this
study. Several studies have been done to assess the level of volatility on house price. Among others is

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Drake (1993) which assess on UK housing market. Later Dolde and Tirtiroglue (1997) and Miles (2008)
also studied on volatility on US housing market. All of studies employed ARCH and GARCH model to
test the level of volatility. Most developed countries have been very active in exploring the level of
volatility in term of house price in local markets especially in UK by employed advances statistical model
such as GARCH. For instance Miles (2008) assessed volatility clustering in the majority of UK regions
by using GARCH effect model. While Morley and Thomas (2011) examined on house price volatility
within other assets such as equities from the point of risk-return relationship and asymmetric adjustment
to shocks. Based on the various previous research, therefor this research used the similar method with
some modifications to suite local situations.

Autoregressive conditional heteroscedasticity (ARCH) models have been widely used in financial
time series analysis and particularly in analyzing the risk in the security or asset. The name “ARCH”
conveys that time-varying variance (heteroskedasticity) that depend on (are conditional on) lagged effects
(autocorrelation). ARCH model was developed by Engle (1982) in his study to estimate the variance of
United Kingdom inflation. A regression model was introduced to model the time-dependent variance.
This model allows the conditional variance of a series to depend on the past realizations of the error
process.
For the purpose of this research, quarterly data from the year 2005 to 2013 were collected. The
essential data in this study were the sales price for residential properties as dependent variables, and the
determinants of house price volatility as independent variables. The data were collected from the
Residential Property Stock Report published by Valuation & Property Services Department (JPPH). The
sales price for nine residential properties in three states in Malaysia were collected for this study.

Table 3 : Notation and Description of Variables

Variables Measurement Sources
Base Lending Rate (BLR) Percentage (%) Central Bank of Malaysia
Gross Domestic Product RM/Million Department of Statistic
(GDP) Malaysia
Housing stock Completion Unit Valuation & Property Services
Department
Inflation Rate Percentage (%) IFO world economic survey
Population Growth % YOY Oxford Economics

The study targeted the states experiencing significant increase in the average residential property
prices. Therefore, Wilayah Persekutuan Kuala Lumpur (WPKL), Johor and Penang were the chosen target
samples. The nine housing sample in this study area are as follows: 1 – 1 ½ storey terrace house, 2 – 3
storey terrace house, 1 – 1 ½ storey semi-detached house, 2 – 3 storey semi-detached house, detached low
cost house , low cost flat, flat, condominium and cluster housing. Note that the sales price for 1 – 1 ½
storey semi-detached in WPKL was not available. However, sales price for cluster was available for
WPKL from the year 2005 to 2013. Therefore, the sales price for cluster was taken into consideration for
WPKL. There were a total of nine residential house types for each of the states in this study.

The determinants for house prices identified from literature reviews were Base Lending Rate
(BLR), Gross Domestic Product (GDP), housing stock, inflation rate and population growth. These data
was obtained from the Datastream service provided by Thomson Reuters, except for housing stock, which
were obtained from the Residential Property Stock Report published by JPPH. Table 3 presents the
notation and description of variables to be tested in this research.

All variables will be computed into natural logarithms except BLR, inflation rate and population growth.
This transformation is applied so that the data will more closely meet the statistical inference of this study

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and also to improve the interpretability and appearance of graph. Volatility clustering is the condition
where the variance is varies through time, with the period of tranquility (low volatility) and also high
volatility. Volatility clustering is representing by time-correlated and time-varying in the property price
series. Volatility clustering or ARCH effect is commonly found in asset markets (Lin & Fuerst, 2013;
Miles, 2008). Thus, in order to examine the house price volatility, the existence of volatility clustering or
ARCH effect must be first tested. The LM test proposed by Engle (1982) is computed as follow:

where is the squared residuals and LM test is is presented by

represents housing returns (difference of the natural logarithms of the housing index) and T is the
sample size. The null hypothesis of LM test is that H0: = 0 and = 0 and = 0 … and = 0. If
2
exceeds the critical value of X , the null hypothesis of no ARCH effects can be rejected. The series
is said to exhibit volatility clustering, the periods of high volatility will be followed by higher volatility or
vice versa.

Autoregressive conditional heteroscedasticity (ARCH) models have been widely used in financial
time series analysis and particularly in analyzing the risk in the security or asset. The name “ARCH”
conveys that time-varying variance (heteroskedasticity) that depend on (are conditional on) lagged effects
(autocorrelation). ARCH model was developed by Engle (1982) in his study to estimate the variance of
United Kingdom inflation. A regression model was introduced to model the time-dependent variance.
This model allows the conditional variance of a series to depend on the past realizations of the error
process. The ARCH model is denoted by ARCH (p) where p is the autoregressive order. Let yt denote a
stationary time series, and expressed as below:

Where c is the mean of yt and is independent identically distributed with mean zero.

Where is independent identically distributed normal random variable. Therefore, the estimated
conditional variance, ARCH (p) model can be specified as:

After estimation of ARCH model, the presence of ARCH effects in the residuals has to be tested. Testing
for ARCH effects is also testing the presence of heteroscedasticity in the time series model. Lagrange
Multiplier (LM) test is proposed again to test for the ARCH effects in the residual. The test statistics is
distributed as Chi-square distribution, , with p degree of freedom. When LM is greater than
distribution, the null hypothesis is rejected, ARCH effect is exists in the residual.

5.0 Data Analysis and Findings

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The relationship between house prices and the determinants was analyzed by employing the
Pearson Correlation Analysis. The independent variables are the determinants while the dependent
variables are the sales prices of residential properties. The level of significance between the two variables
is determined by consulting the two-tail significance. If the value of two-tailed significance is less than
0.05, then the correlation between is considered to be significant (meaning that it can be 95% confident
that the relationship between that two variables is not due to chance). In this case, the null hypothesis is
rejected and the alternative hypothesis is accepted. Meanwhile, the values of the Pearson Correlation
range from -1 to 0 representing a negative correlation (as one variable increases, the other variable
decreases), and the values ranging 0 to +1 representing a positive correlation (as one variable increases,
the other also increases). The closer the value to -1 or +1, the stronger the association between the
variables. The analysis was carried out according to the house prices of each state. The results of Pearson
Correlation Analysis are shown in Table 4 to Table 6. Table 4 shows the correlation between house prices
in Kuala Lumpur and the determinants. The result shows that only GDP, housing stock and population are
the most significant determinants on the house prices in Kuala Lumpur (p<0.05). However, only the house
price for Cluster in Kuala Lumpur was not influenced by housing stock while sharing the same
determinants, namely, GDP and population growth with the rest of the properties. Moreover, only house
price for Cluster was influenced by BLR at 0.05 level of significant. BLR has a significant positive
relationship with the house price for Cluster in Kuala Lumpur. GDP has strong positive correlation to the
house prices while housing stock and population growth has negative correlation to the house prices in
Kuala Lumpur. Table 7 shows the correlation between house prices in Johor and the determinants. The
result shows the correlation between house price of flat and the determinants are not significant (p>0.05).
Therefore, the null hypothesis is accepted. There is no significant relationship between house price of flat
and the determinants. On the other hand, house price for condominium has a positive correlation to GDP
but a negative correlation to population. Apart from that, low cost flat only has negative relationship with
the population growth at 0.05 level of significant. Similar to the correlation in Kuala Lumpur, GDP has
strong positive correlation to the house prices while housing stock and population growth has negative
correlation to the house prices in Johor.

The correlation between house prices in Penang and the determinants are shown in Table 6. The
table shows that GDP, housing stock and population growth are the determinants for the whole housing
market in Penang. GDP have strong positive correlation to the house prices where the Pearson Correlation
r-value is more than 0.5 and near to 1.0. Both housing stocks and population growth has negative
relationship with the house prices in Penang. However, the relationship between housing stocks and
house prices are weaker than the relationship of population growth and house prices.

Specifically, these analysis shows that there are three common determinants which has significant
relationship with the house prices in Malaysia. The determinants are GDP, housing stocks and population
growth. The relationship between the determinants and house prices are strong. From the r value, GDP
has positive correlation with the house prices while housing stocks and population growth have negative
correlation with the house prices. Based on the result, house price will increase when GDP increases or
vice versa. This is supported by Holly & Jones (1997) that income is the driving force behind the house
prices. As income is increases, the purchasing power will also increase. The demand for housing is
increasing significantly line with income increment. House price change is also driven by the supply of
housing stocks. The result shows that there is a negative relationship between house prices and housing
stocks. This is in line with the theory of supply and demand. When the supply is limited, and the demand
is increasing, the house price is forced to increase. The behavior of the housing market is dependent on
the buyer and seller. This study shows that population growth has a negative relationship with the house
prices. Increases in population growth will result in decreases of house prices or vice versa. This
phenomenon may be caused by an overestimation of supply in the market when the population expands.
The demand for housing is difficult to determine when the population expands and when it stops growing.

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Table 4 : Correlation between House Prices in Kuala Lumpur and the Determinants
LBLR LGDP LHS LINF POP
Pearson Correlation 0.231 .897** -.778** -0.011 -.946**
LWPST1
Sig. (2-tailed) 0.175 0.000 0.000 0.949 0.000
Pearson Correlation 0.235 .935** -.810** -0.006 -.966**
LWPST2
Sig. (2-tailed) 0.167 0.000 0.000 0.974 0.000
Pearson Correlation 0.196 .920** -.768** -0.023 -.891**
LWPSD2
Sig. (2-tailed) 0.253 0.000 0.000 0.895 0.000
Pearson Correlation 0.241 .689** -.470** -0.074 -.655**
LWPD
Sig. (2-tailed) 0.156 0.000 0.004 0.667 0.000
Pearson Correlation .362* .446** -0.21 -0.085 -.343*
LWPC
Sig. (2-tailed) 0.030 0.006 0.219 0.621 0.040
Pearson Correlation 0.241 .816** -.736** 0.081 -.880**
LWPLCH
Sig. (2-tailed) 0.157 0.000 0.000 0.637 0.000
Pearson Correlation 0.117 .838** -.791** -0.046 -.911**
LWPF
Sig. (2-tailed) 0.498 0.000 0.000 0.791 0.000
Pearson Correlation 0.08 .872** -.779** -0.038 -.917**
LWPCON
Sig. (2-tailed) 0.641 0.000 0.000 0.825 0.000
Pearson Correlation 0.017 .724** -.660** -0.058 -.799**
LWPLCF
Sig. (2-tailed) 0.924 0.000 0.000 0.738 0.000
Notes: ** indicates significant at the 0.01 level, * indicates significant at the 0.05 level

Table 5 : Correlation between House Prices in Johor and the Determinants

LBLR LGDP LHS LINF POP
Pearson Correlation 0.211 .819** -.740** 0.000 -.886**
LJST1
Sig. (2-tailed) 0.217 0.000 0.000 0.996 0.000
Pearson Correlation 0.167 .872** -.756** -0.067 -.930**
LJST2
Sig. (2-tailed) 0.331 0.000 0.000 0.699 0.000
Pearson Correlation 0.173 .819** -.731** -0.031 -.882**
LJSD1
Sig. (2-tailed) 0.313 0.000 0.000 0.856 0.000
Pearson Correlation 0.137 .853** -.763** -0.015 -.911**
LJSD2
Sig. (2-tailed) 0.426 0.000 0.000 0.933 0.000
Pearson Correlation 0.263 .638** -.629** 0.113 -.687**
LJD
Sig. (2-tailed) 0.121 0.000 0.000 0.510 0.000
Pearson Correlation 0.113 .537** -.516** 0.003 -.613**
LJLCH
Sig. (2-tailed) 0.513 0.001 0.001 0.986 0.000
Pearson Correlation 0.005 0.257 -0.182 -0.100 -0.29
LJF
Sig. (2-tailed) 0.975 0.130 0.289 0.560 0.086
Pearson Correlation 0.183 .368* -0.273 0.221 -.443**
LJCON
Sig. (2-tailed) 0.286 0.027 0.107 0.196 0.007
Pearson Correlation 0.119 0.315 -0.292 0.008 -.418*
LJLCF
Sig. (2-tailed) 0.490 0.062 0.084 0.965 0.011
Notes: ** indicates significant at the 0.01 level, * indicates significant at the 0.05 level

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Table 6 : Correlation between House Prices in Penang and the Determinants

LBLR LGDP LHS LINF POP

Pearson Correlation 0.143 .917** -.777** -0.062 -.927**
LPST1
Sig. (2-tailed) 0.404 0.000 0.000 0.719 0.000
Pearson Correlation 0.02 .910** -.797** -0.102 -.950**
LPST2
Sig. (2-tailed) 0.908 0.000 0.000 0.555 0.000
Pearson Correlation -0.11 .690** -.614** -0.243 -.762**
LPSD1
Sig. (2-tailed) 0.525 0.000 0.000 0.153 0.000
Pearson Correlation 0.063 .845** -.732** -0.077 -.907**
LPSD2
Sig. (2-tailed) 0.716 0.000 0.000 0.654 0.000
Pearson Correlation 0.035 .674** -.621** 0.033 -.713**
LPD
Sig. (2-tailed) 0.838 0.000 0.000 0.849 0.000
Pearson Correlation 0.039 .633** -.610** -0.086 -.698**
LPLCH
Sig. (2-tailed) 0.820 0.000 0.000 0.618 0.000
Pearson Correlation 0.126 .913** -.802** -0.061 -.956**
LPF
Sig. (2-tailed) 0.466 0.000 0.000 0.725 0.000
Pearson Correlation 0.122 .898** -.815** -0.106 -.956**
LPCON
Sig. (2-tailed) 0.479 0.000 0.000 0.537 0.000
Pearson Correlation -0.169 .722** -.793** 0.056 -.815**
LPLCF
Sig. (2-tailed) 0.323 0.000 0.000 0.746 0.000
Notes: ** indicates significant at the 0.01 level, * indicates significant at the 0.05 level

5.1 ADF Unit Root Test

Unit root test is important to perform for examining the stationary of time series data. This study
adopted Augmented Dickey-Fuller (ADF) unit roots test to test the integration of all variables including
the independent variables. Table 7 reviews the ADF unit root test results. The table shows that only few
variables are not stationary at level. Thus, null hypothesis indicate that the variables contain a unit root
cannot be rejected completely. However, after the first differencing on each of the variable, all the
variables are stationary at 1 per cent level of significant. Thus, the null hypothesis can be rejected and
accept the alternative hypothesis. This means that all the variables are stationary of order 1, which is I
(1). The only exception is the house price of condominium in Kuala Lumpur which it is statistically
significant at 5 per cent level. In short, the shocks to the series are temporary and the effects will
disappear and revert to its long run.

Table 7 : ADF Unit Root Test Result

Level First Difference

Variables Intercept Trend and Intercept Intercept Trend and Intercept
LWPST1 1.303819 -2.275352 -8.414975*** -9.021171***
LWPST2 0.024263 -2.675686 -7.738157*** -7.752171***
LWPSD2 -1.757082 -5.449413*** -6.676313*** -6.694451***
LWPD -3.542440** -5.342860*** -5.607083*** -5.503600***
LWPC -2.461237 -2.607074 -12.73833*** -12.55945***
LWPLCH 0.127597 -1.860973 -7.914379*** -8.493177***

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LWPF 0.223202 -3.103876 -8.187807*** -8.349370***

LWPCON 0.405225 -3.594514** -3.515604** -3.445759
LWPLCF 0.662211 -2.826711 -5.936228*** -6.691947***
LJST1 0.924349 -1.261696 -6.786791*** -6.509313***
LJST2 1.165003 -2.183288 -5.855865*** -6.702260***
LJSD1 -0.538974 -2.705069 -5.538035*** -6.015375***
LJSD2 -0.160185 -5.599498 -11.43724*** -11.36198***
LJD -3.365013** -4.214304** -7.025145*** -7.631943***
LJLCH -3.345832** -2.996735 -4.029235*** -4.002673**
LJF -4.293266*** -4.289435*** -8.321760*** -8.170505***
LJCON -2.810158 -3.086199 -6.589135*** -6.522250***
LJLCF -3.167540** -3.080468 -6.495064*** -6.894230***
LPST1 -0.918416 -4.169395** -8.533984*** -8.511940***
LPST2 0.682182 -3.691386** -6.686555*** -6.824776***
LPSD1 -2.085646 -4.366833*** -6.985112*** -7.020241***
LPSD2 -17.57615*** -6.567832*** -14.21871*** -15.50568***
LPD -1.010753 -2.865922 -8.045420*** -8.269893***
LPLCH -3.255665** -4.810104*** -8.224502*** -8.279828***
LPF 2.517959 -1.833268 -7.118066*** -7.347534***
LPCON 2.735593 -1.663438 -1.568434 -5.290832***
LPLCF -1.894698 -3.281922 -7.104359*** -7.014561***
POP -4.450722*** -2.661871 -5.967976*** -0.613541
BLR -2.367410 -2.318995 -4.049227*** -3.995619**
GDP -1.144068 -3.563841** -3.928903*** -3.964912**
INF -3.925527*** -3.675319** -5.471203*** -5.473875***
HS -1.557843 -4.297406*** -7.232541*** -7.106363***
Notes: * indicates at the 10 per cent level of significance, ** indicates at the 5 per cent level of significance and
*** indicates at the 1 per cent level of significance

5.2 Volatility clustering

ARCH LM test by Engle (1982) was undertaken to investigate the existence of volatility
clustering in the house price series prior to employing an ARCH model. The results of LM tests for 9
residential properties prices in three states are depicted in Table 8. The results shows that house prices in
Kuala Lumpur has positive LM values at 1 per cent of significance. The exemptions are Detached and
Cluster house price which are not significant at p-value (P>0.10). Therefore, the house prices in Kuala
Lumpur which have volatility clustering are Terraced, Semi-Detached, Low Cost House, Low Cost Flat,
Flat and Condominium. On the other hand, Terraced, Semi-Detached, Detached and Condominium in
Johor are also has positive significant LM values. This suggests the result rejecting the null hypothesis of
homoscedasticity and proved that there is volatility clustering in the series. However, no similar result
was found in Low Cost House, Low Cost Flat and Flat.

In Penang, there are Terraced houses, 2-3 Storey Semi-Detached, Flat and Condominium which
shows positive LM value at 1 per cent of significance. Low Cost Flat and 1- 1 ½ Storey Semi-Detached
shows positive LM value at 5 per cent and 1 per cent of significance respectively. Detached house and

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Low Cost House in Penang do not show significant volatility clustering. However, the result of ARCH
LM test is inconsistent with assessed house price trend in line graph. In the first objective, it is revealed
that Detached, Semi-detached and condominium has volatile house price trend. Result of ARCH LM test
shows that detached house has weak evidence in volatility clustering. This explains that house price for
detached house are not fulfilling condition of volatility clustering, which is low volatility is followed by
low volatility and vice versa. Overall, over half of the sample properties in the three states have volatility
clustering. This result is consistent from the findings by Miles (2008), whereby the ARCH effects was
found in over half of all U.S. states. The strong evidence of volatility clustering denotes that ARCH
model is appropriate to carry out in order to analyze the volatility in these housing markets. The ARCH
effects also showed that there are potential of underestimation of actual risk in the conditional variance.

Table 8 : ARCH LM tests for Volatility Clustering

LM (p-value)
Housing Types
Kuala Lumpur Johor Penang

1- 1 1/2 Storey Terraced 22.67372 (0.0000)*** 23.79993 (0.0000)*** 15.16804 (0.0001)***

2- 3 Storey Terraced 26.99294 (0.0000)*** 28.01913 (0.0000)*** 13.15332 (0.0003)***

1- 1 1/2 Storey Semi- 23.79993 (0.0000)*** 3.056047 (0.0804)*

Detached

2- 3 Storey Semi-Detached 8.82198 (0.0030)*** 15.5732 (0.0001)*** 11.32194 (0.0008)***

Detached 0.724113 (0.3948) 3.180985 (0.0745)* 1.740779 (0.1870)

Low Cost House 24.67099 (0.0000)*** 0.008716 (0.9256) 1.115163 (0.2910)

Low Cost Flat 19.24576 (0.0000)*** 0.007775 (0.9297) 6.288122 (0.0122)**

Flat 11.55313 (0.0007)*** 0.043378 (0.8350) 24.18275 (0.0000)***

Condominium 18.87245 (0.0000)*** 6.650956 (0.0099)*** 24.21993 (0.0000)***

Cluster 0.091032 (0.7629)

Notes: *indicates at the 10 per cent level of significance, ** indicates at the 5 per cent level of significance and
***indicates at the 1 per cent of significance

5.3 The ARCH Model

Once the house price series are determined to have volatility clustering, ARCH model is
conducted together with the determinants to examine the volatility of the series. From the result of ARCH
LM test, there are 7 types of properties in Kuala Lumpur and 6 types of properties in Johor that were to be
estimated using the ARCH model. The results for each market are shown in Table 9 to 11. In analyzing
the result, the significance of the variables (p-value) was determined from the Z score. Z score is a
measure of standard deviation. In the end, two-tailed p-value (|Z|>1) was adopted in this study. The null
hypothesis suggests that the volatility of dependent variables (house price) is affected by independent
variables (determinants). In Kuala Lumpur, the most significant determinant to the house price volatility
is the Base Lending Rate (BLR). BLR is 5 per cent significant to the house price of terraced, low cost
house and flat in Kuala Lumpur. Gross Domestic Product (GDP) is also at 1 per cent level of significant
to the house price of 2-3 storey semi-detached. Furthermore, low cost houses are affected by the changes

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in the inflation rate at the 10 per cent level of significant. The determinants to house price volatility in
Kuala Lumpur are BLR, GDP and inflation rate.

Table 12, signifies that the housing stock is the most significant determinants of the housing market
in Johor. It is at the 1 per cent level of significant for the 1-1 ½ storey terraced, 1-1 ½ storey semi-
detached and at 10 per cent level of significant for condominium. At the same time, BLR and inflation
rate also have a significant effect on the house price volatility for 2-3 storey terraced dwellings. It is noted
that house price of condominium in Johor is volatile by three determinants; these are the BLR, housing
stock and the inflation rate.

The housing market in Penang is less influenced by these determinants. At a 1 per cent level of
significant, there were no significant determinants of house price volatility in Penang. However, GDP had
a 5 per cent level of significant for the 1-1 ½ storey terraced while housing stock had a 10 per cent level
of significant for the 2-3 storey terraced. Furthermore, inflation rate was at 5 per cent of significant for the
low cost flat. The determinants of house price volatility in Penang are: GDP, housing stock and inflation
rate.

In summary, the most significant determinants of house price volatility from the three housing
markets were found to be: the BLR, GDP, housing stocks and inflation rate.

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Table 9 : ARCH model for Kuala Lumpur
1- 1 1/2 Storey 2- 3 Storey 2- 3 Storey Semi- Low Cost Low Cost
Flat Condominium
Housing types Terraced Terraced Detached House Flat
Mean equation
Constant 23.7624 19.4217 -1.1030 28.5279 16.1815 17.7180 16.1376
(5.9025)*** (7.1281) (-0.1777) (1423.1010) (5.3757)*** (4.8579)*** (2.8191)***
Base Lending Rate 0.1283 0.0903 -0.0250 0.1662 -0.0006 0.0855 -0.0165
(2.2444)** (2.4141)** (-0.3461) (3.1671)** (-0.0179) (2.3418)** (-0.2623)
Gross Domestic -0.6210 -0.2492 1.3043 -1.0391 -0.2916 -0.2539 -0.0494
Product
(-2.3070) (-1.2300) (3.0203)*** (-25.1585) (-1.3931) (-0.9553) (-0.1302)
Housing Stock 0.0926 0.0761 0.0397 0.1105 0.0056 -0.0498 0.0850
(1.0517) (1.6105) (0.1954) (1.4027) (0.0894) (-0.7310) (0.5441)
Inflation Rate 0.0140 0.0149 0.0066 0.0318 0.0047 -0.0106 0.0160
(0.8030) (1.2972) (0.2052) (1.9554)* (0.3879) (-0.8881) (0.7962)
Population -3.2732 -2.8372 -0.4276 -3.8371 -0.9438 -1.7896 -2.0833
(-9.1132) (-7.6635) (-0.5111) (-14.0926) (-2.5914) (-3.8872) (-3.4018)
Variance equation
Constant 0.0053 0.0035 0.0150 0.0147 0.0016 0.0029 0.0102
(2.9539)*** (1.9969)** (3.0520)*** (1.9430)* (2.9980)** (1.7779)* (2.0099)**
ARCH(1) -0.2362 -0.1591 0.0094 -0.4616 0.4744 0.4760 -0.1439
(-1.1964) (-0.3495) (0.0430) (-0.9292) (1.1231) (1.4360) (-0.3387)
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Table 10 : Result of ARCH model for Johor
1- 1 1/2 Storey 2- 3 Storey 1- 1 1/2 Storey Semi- 2- 3 Storey Semi-
Housing types Detached Condominium
Terraced Terraced Detached Detached
Mean equation
Constant 15.8267 13.3210 15.8267 22.2155 32.4461 18.4097
(325.0028) (5.2223)*** (325.0028) (6.7403) (3.1078)*** (4.3398)***
Base Lending Rate 0.0201 0.0417 0.0201 0.0570 0.1300 0.1488
(1.4549) (1.7568)* (1.4549) (1.2280) (1.0555) (3.0050)***
Gross Domestic Product -0.1975 0.0441 -0.1975 -0.5128 -1.3501 -0.4950
(-27.3430) (0.2511) (-27.3430) (-2.1118) (-1.7744) (-1.6481)
Housing Stock 0.0485 0.0299 0.0485 0.0084 0.1731 0.1504
(3.3703)*** (0.4472) (3.3703)*** (0.1484) (0.7210) (1.9072)*
Inflation Rate 0.0004 0.0017 0.0004 0.0108 0.0639 0.0419
(0.0847) (0.1873) (0.0847) (0.9211) (1.5752) (2.6651)***
Population -1.1075 -1.3515 -1.1075 -2.1928 -3.8949 -1.7507
(-14.8406) (-4.1121) (-14.8406) (-5.5338) (-2.7725) (-3.2628)
Variance equation
Constant 0.0003 0.0009 0.0003 0.0038 0.0216 0.0052
(0.8228) (1.7550)* (0.8228) (2.7743)*** (4.8067)*** (1.1226)
ARCH(1) 1.4980 0.9180 1.4980 -0.0608 0.0562 0.5464
(2.1474)** (1.5720) (2.1474)** (-0.1631) (0.2358) (1.0666)
Note: *indicates at the 10 per cent level of significance, **indicates at the 5 per cent level of significance and ***indicates at the 1 per cent level of
significance
Table 11: Result of ARCH model for Penang
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1- 1 1/2 Storey 2- 3 Storey 1- 1 1/2 Storey Semi- 2- 3 Storey Semi- Low Cost
Housing types Flat Condominium
Terraced Terraced Detached Detached Flat
Mean equation
Constant 8.397172 10.59936 15.49774 19.94888 19.07836 15.12843 22.06399
(2.8839)*** (2.4758)** (1.5295) (4.1474)*** (10.0023) (4.5586)*** (6.2624)
Base Lending Rate -0.015942 -0.093304 -0.092606 -0.025113 -0.044145 -0.003466 0.067608
(-0.5574) (-2.2771) (-1.0494) (-0.4697) (-2.4180) (-0.2134) (1.62)
Gross Domestic 0.405905 0.363634 -0.03393 -0.293284 -0.403345 -0.081704 -0.401678
Product (1.9895)** (1.2031) (-0.0485) (-0.8682) (-3.0542) (-0.3668) (-1.5901)
Housing Stock 0.075183 0.127723 0.110023 0.18703 -0.057097 0.105207 -0.017674
(0.9336) (1.6876)* (0.6065) (1.5239) (-1.2361) (1.6015) (-0.2513)
Inflation Rate 0.003225 0.00934 -0.023166 0.012757 0.017218 0.006956 -0.012993
(0.2593) (0.7252) (-0.8712) (0.6257) (2.2208)** (0.7381) (-1.1115)
Population -1.160545 -1.819277 -1.702428 -2.952756 -1.429065 -2.020994 -2.805709
(-2.9125) (-3.1955) (-1.6235) (-4.0882) (-5.0974) (-5.2803) (-7.1669)
Variance equation
Constant 0.005119 0.005701 0.021981 0.008471 0.000852 0.004049 0.00263
(3.7802)*** (3.0647)*** (3.0727)*** (5.6401)*** (1.0145) (3.4631)*** (1.5412)
ARCH(1) -0.143474 -0.175252 -0.196799 -0.16544 1.362792 -0.452104 0.604366
(-4.1986) (-0.8240) (-1.6760) (-3.2550) (1.9851)** (-0.8924) (1.0705)
Note: *indicates at the 10 per cent level of significance, **indicates at the 5 per cent level of significance and ***indicates at the 1 per cent level of
significance
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6.0 Property Implications

Based on the results in the previous chapter, the difference between significant determinants of
house price and volatility were identified. From Table 12, it can be noticed, that there are three significant
determinants of house price while there are 4 for house price volatility. The significant determinants for
house price are GDP, housing stocks and population growth. In the case of house price volatility,
population growth is not a determinant; however, BLR and inflation rate are determinants for house price
volatility. This means that shocks in BLR, GDP, housing stocks and inflation rate will produce dynamic
responses in the Malaysian housing market.

This paper provides an insight to the house price volatility in Malaysia based on the sample of
house prices within the states that showed significant growth in the housing market. The findings of this
study proved that volatility clustering exists in more than half of the house price in Malaysia. There are 7
housing types in Kuala Lumpur and Penang and 6 housing types in Johor which exhibited volatility
clustering in their house price series. This implies that the housing market is exposed to an amount of
underestimated level of risks. This information will raise investors’ and policy makers’ awareness of the
significance of house price volatility in the Malaysia housing market. This study found that the house
price trends of Kuala Lumpur exhibited higher volatility as compared to the house price trends of other
states. As a result, the price of 2-3 storey semi-detached properties in Kuala Lumpur has increased by
240% from the lowest price of RM 807,875 (Q3 2005) to the highest price of RM 2,745,969 in Q4, 2013.
Another significant increase also occurred in the 2-3 storey terraced property house prices in Kuala
Lumpur, where it has increased by 150% from 2005 to 2013.

In recent years, people are panicking over the exceptional boom in the housing market. There is
speculation that the housing bubble will burst in the housing market which will affect the high end
overpriced property market. However, this issue can be resolved if the volatility clustering pattern in the
house price trend is determined. Volatility clustering can be tracked by using ARCH LM test. This
approach will enable investors to analyze the potential underlying risk in the house price trend, and make
an extended forecast to predict the future house price trend. This study also showed that volatile house
price trend does not have volatility clustering. Volatility clustering refers to the period of low volatility,
followed by low volatility or vice versa. Therefore, volatility clustering cannot be explicitly identified
from the house price trend. The ARCH LM tests were used to test the volatility clustering in the house
price time series. This will allow investors and policy makers to assess the volatility clustering in the
house price time series. Consequently, this will expose the underlying risk in the housing market and will
assist investors to properly manage their portfolios. Furthermore, this result will also benefit those who
develop housing market pricing derivatives. Furthermore, the result from ARCH model showed that there
are 4 determinants which have impacts to the housing market in Malaysia. This study provides the
information on the level of significance of determinants with the house types. This will enhance decision-
making process for house investors. Investors can take into consideration the specific determinants which
will impact specific housing type before making their investment decision, hence minimizing the risk and
prevent loss of profits. Consequently, the housing market in Malaysia will grow further and help generate
economic growth. Apart from that, policy makers can also take these determinants into consideration
when making housing policies. Appropriate housing policy can be applied to the housing sector and
attract the demand for homeownership and housing investment.

ARCH model allows the conditional variance to change over time and the main purpose of ARCH
model is to predict the future conditional variance. The ARCH LM tests diagnosed that there were no
ARCH effects in the remaining residual. Thus, ARCH model is a sufficient representation to analyze
house price volatility. The investors should estimate the conditional variance by using the ARCH model
as the measure for underestimate of the actual risk. Recent global financial crisis had drawn the attention

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Vol 03, No 02, 2016

of policy makers and investors to the importance of house price volatility. The ability to capture and track
volatility clustering in the Malaysian house price in a time series is going to make a big impact to the
Malaysia economy. Therefore, the volatility risk can be estimated to prevent loss of profit. This will
curtail speculation and herd behavior since investors will be knowledgeable about the condition of the
housing market in Malaysia.

Table 12 : Comparison of determinants for house price and house price volatility
Most significant determinants
House Price House Price Volatility
1. GDP 1. BLR
2. Housing Stocks 2. GDP
3. Population Growth 3. Housing Stocks
4. Inflation rate

7.0 Summary

This study has investigated the house price volatility in the Malaysian housing market by using
quarterly time series data from 2005 to 2013. A volatile trend was observed in detached, semi-detached
and condominium time series. The study on the volatility of house price in Malaysia is very limited. As
such, the findings of this research contribute in various ways.
Firstly, this study has identified the determinants of house price volatility from the
macroeconomics factors. Factors such as Base Lending Rate (BLR), Gross Domestic Product (GDP),
housing stock, inflation rate and population growth have been determined as factors that had contributed
to the price volatility in Malaysia’s residential sector.
Secondly, the factors were tested by employing several econometrics technique to measure the
level of volatility of house price. From the findings, the stakeholders of Malaysia’s residential industry
were able to identify which factors need to be responsive in order to control the price from booming.
Furthermore, the analyses also differentiate the factors determination between house price and house price
volatility. Therefore, property industry players will be able to know which factors will affect the
residential industry in Malaysia and in particular affect the house pricing.
More importantly, the findings from this research will contribute towards understanding the
relationship between macroeconomics factors and house price determination in Malaysia. It is important
to study the house price issues because there are limited literature and analyses done on the subject matter
and the fact that recently, residential has become a sensitive issue in Malaysia. With Malaysia potentially
becoming a developed country in the near future, this delicate issue needs to be explored and research
extensively, especially since the cost of living is escalating.

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Vol 03, No 02, 2016

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