Task

The price houses in Klang Valley has been constantly increasing over the years. With reference

to example, provide an analysis on the market forces leading to this situation.

a) Explain the theory of market equilibrium and relate it to the housing market

b) Provide a description on the price levels of houses in a residential area.

c) Explain the demand factors leading to the demand situation

d) Explain the supply factor leading to supply situation

e) Discuss whether it is possible to prevent the prices from increasing too much to make

houses more affordable to the people.

Answer:

a) Explain the theory of market equilibrium and relate it to the housing market.

Market equilibrium is a situation when quantity demanded and quantity supplied are

equal and there is no tendency for price or quantity to change. When a market is in equilibrium,

the quantity that sellers are willing to sell are exactly balances the quantity that buyers are

willing to buy, and there is no tendency for the market price to increase or decrease.

Equilibrium can occur irrespective of the price and quantity involved.

Equilibrium Demand and Supply

For example, in the standard text-book model of perfect competition, equilibrium

occurs at the point at which quantity demanded and quantity supplied are equal. Market

equilibrium in this case refers to a condition where a market price is established through

competition such that the amount of goods or services sought by buyers is equal to the amount

of goods or services produced by sellers. This price is often called the competitive price or

market clearing price and will tend not to change unless demand or supply changes and the

quantity is called "competitive quantity" or market clearing quantity.

 The price of houses in Serdang has been increasing since year 2014 untill now based

on research done by iproperty. Therefore, this shows that the housing market in serdang are

facing a shortage of houses compared to the demand from the citizens in that area. According

to the equilibrium theory, quantity of demand must be equal to the quantity of supply to ensure

that there will be no inclination to think or do in a certain way for the change in price. When

shortage happen, which result from excess demand, the construction company will increase the

price of houses to reach the equilibrium price and lower the demand.

The research by iproperty and property guru shows that there are increase in house price

in Serdang, this explains that there are shortage in market condition which lead to the rise in

market price. We know that Serdang now are emerging into a modern metropolitan city and it

is now popularly known as Seri Kembangan. With the emerging of its township, Serdang are

providing more jobs through its banks, markets, offices, university, hotels and schools. Thus,

attracting and inviting more residents into it. Unfortunately, the quantity demanded for houses

here are more than the quantity supplied by housing developers which doesn’t meet the market

equilibrium demand. Therefore, the shortage in market condition for houses here allows the

market price to increase. Example below shows the shortage of houses demanded, therefore

the construction company have to increase the price from 100 to 150 to get the equilibrium

price and demand.

b) Provide a description on the price levels of houses in a residential area.

Difference Price Level Of Terrace Houses At Serdang Between 2014 And 2015

Demand Of Terrace House At Serdang In 2014

Price (RM)
320,000 D0

300,000

280,000

240,000

200,000

180,000 D0

0 Quantity (unit)
10 20 30 40 50

Demand Of Terrace House At Serdang In 2015

Price (RM)
320,000 D0

300,000 D1

280,000

240,000

200,000

180,000 D1 D0

0 Quantity (unit)
10 20 30 40 50
 The above two demand curve shows the difference between the price and quantity of

the terrace house demanded at Serdang in 2014 and 2015. It shows that the price of terrace

house at Serdang, the demand curve moves to the left (D0 to D1) in year 2015 when the price

level of terrace house at Serdang increases. When the price of house increases the quantity of

demanded decreases 50 to 40 units of houses for price of RM180,000. The demand decreases

because the price of the houses increased but the consumer’s income remain the same. When

income increases, consumers’ demand for more although the price of houses are high.

Supply Of Terrace House At Serdang In 2014

Price (RM)
320,000 S0

300,000

280,000

240,000

200,000 S0

180,000

0 Quantity (Unit)
10 20 30 40 50

Supply Of Terrace House At Serdang In 2015

Price (unit)
320,000 S1

300,000 S0

280,000

240,000

200,000 S1

180,000 S0

0 Quantity (unit) v
10 20 30 40 50
 The above two supply curve shows the difference between the price and quantity of the

terrace house supplied at Serdang in 2014 and 2015. It shows that the price of terrace house at

Serdang, the supply curve moves to the left (S0 to S1) in year 2015 when the price level of

terrace house at Serdang increases. When the price of house increases the quantity of supplied

decreased 30 to 15 units of houses for price of RM240,000. The supply of houses decreased

because natural resources, labour, capital and entrepreneurship are all required to produce less

houses, and the prices of these resources affect supply. The increases in the prices of natural

resources adds to the cost of production.

Different Price Level Of Terrace Houses Between Shah Alam And Serdang

The price of terrace houses at Serdang is between RM180,000 to RM320,000 compare

to Shah alam is between RM600,000 to RM1,000,000. The price of houses at Shah Alam more

expensive compare to Serdang area. Houses at Shah Alam expensive because of the population.

Price of houses depends on the size of the total population or the number of the buyers in the

market. A larger population with a high rate of growth creates an increase in price of houses.

Furthermore, the other reason is at Shah Alam have many facilities for example for have many

companies and many jobs with high salaries. The factor of demand also stated that the

population is one of the factor that influence demand. The need of shelter by people in Shah

Alam area increase the demand of house. By the law of demand, The price will also be high so

that the equilibrium price will be reached. Compared to Serdang, the job opportunity is higher

in Shah Alam, therefore many people stay in Shah Alam.

c) Explain the demand factors leading to the demand situation

Demand is the ability and willingness to buy specific quantities of goods in a given

period of time at a particular price, ceteris paribus. Law of demand stated that the higher the

price of a product, the lower the quantity demanded for that particular goods, ceteris paribus.

Negative relationship exist between price and the quantity demanded.

Graph below shows the increase in price will make the quantity supply deceased. The P0 will

move to Pt while Q0 will move to Qt.

There are many factor that can lead to demand situation which include the internal and

external factor. For the internal factor of demand, it related to 3 main factor. The first one is

the price of goods. If the price of goods is high, the demand will drop or low. As for the

second one which is services. For example, if the service of house is good the demand of

the particular product will be increased. The service here can be in term of fixing the damage

of house or a better customer services provided by the company to attract customer. The

third factor is profit margin. If the profit margin is high, the price of goods will be

increased. Therefore, the demand of the goods will be reduced. There are other external

factor that also lead to demand situation:

Price of related good

Related goods can be divided into 2 which is substitute and complimentary good. For

an example, if the price of Sime Darby property (substitute to IOI property) is higher, the

demand for IOI property will be high. The demand of product will increase if price of

substitute product rises and vice versa. While for complimentary good affect the product in

opposite direction to the change of price. For example, if the price of house increases, the

quantity demanded for houses will decrease, therefore the cement used to build house will

be decreases.

Consumer’s income

When income increases, the demand of goods and services will be increased. For

example, the increase in income will increase the demand for normal goods such as clothes

and food. Demand of houses such as terrace will also increase as people will choose terrace

over flat.

Taste and fashion

When one fashion or trend emerges, the trend will increase the demand of particular

product and vice versa. For example, if there is a trend where all people will buy a

condominium house, the demand for condominium houses will be rises.

Population and number of buyer

The larger population of one area with a high rate of growth, it creates a larger demand

and services. For example, there is an increase in a population of Shah Alam residential

area. This result in increase of demand for houses in Shah Alam as people need house for

shelter.
Expectation of future prices

The higher the expected future price of product, the higher the current demand of

product. For an example, the price of terrace houses is expected to fall in the next two month,

the demand of the terrace houses right now will fall because people will wait until the price

fall before buying them.

Advertisement

Advertisement is another factor of demand where it can increase brand loyalty to the

goods and increase demand. For example, Eco WORLD making a huge advertisement and

concert by inviting Malaysian celebrity or give a free food for grand opening of one

particular project. This increase the attention of customer and at the same time might

increase the demand of houses from Eco WORLD.

Festive season and climate

Festive and climate season become one of the factor in demand where different season

and climate will shows a different demand. As an example, during Hari Raya, the demand

of lemang will be high compared to another season and of course, if demand is high, the

price will be high as well, Ceteris paribus.

d) Explain the supply factor leading to supply situation

The definition of supply is the quantity of economic goods or services that producers

like to produce and have the ability to produce, and make available for sale at the given prices.

The law of supply stated that, more of a good will be supplied if the price is higher, Ceteris

paribus. Supply curve represents the relationships between the price of a good and the quantity

supplied.

Graph below describes that the higher quantity supplied, the price is also higher (P1

increases to P2, Q1 increases to Q2). So, there is positive relationship between market price

and the quantity supplied.

In case of housing market in Malaysia, there are some factors influencing the supply of

houses. Price of houses in Malaysia is the most influencing factors of quantity supplied in

housing market Malaysia. The higher price of the house, quantity supplied will be larger.

Quantity supplied are positively related to the price.

The inputs are raw materials, labor, utilities, liscensing fees, or may be the other goods.

When the price of one or more inputs rises, the production of houses will be lessen because the

producer only get small profit from the production. Inversely, if the price of the inputs falls,

producer will build more house for sale. For example: If the price of cement (input) Increase,

The quantity supply of houses (output) will decrease. There are factor that influence supply

such as:
Technology

The machines which is used in the process of housing production constitute a advanced

technology. By using the technology, the process of production come to be more efficient. So,

producer can reduce the cost of production then there will be higher quantity of houses.

Therefore, the supply of the houses will increases. Since the advancement of technology can

increase the supply, the curve is shifting from S to S1.

Expectation of producer

The Malaysian producer’s expectation is one of the factors affecting the supply

in housing market. If the producer expect that the price of house in the future is going to be up,

they will not produce any houses recently. Definitely, they prefer to sell a lot of house in the future when the

price is already up for getting more profit.

Number of sellers

This is similar to the number of consumers as the factor of demand. It has direct effect

to the housing market in Malaysia. When there is a large number of sellers in the market or

let’s say if we put in a seller as addition, it will increasing the quantity of houses supplied.

Taxes and subsidies

Both of them are the last two factors infuencing the housing market in Malaysia. The

taxes and subsidies have an opposed impact to the market. If the taxes given by the Government

of Malaysia increase, the production costs will increase too, so the lessen houses will be

produced and supplied in Malaysia. Whereas, if government set up the higher subsidies to the

housing market, it will help producer in the production of houses. The subsidies will decrease

the cost of production, profits increase, so producer will increase the supply
Supply situation

In the supply market we consider the behavior of another part of the market – sellers. There is

only one motivation which is maximizing their wealth. Profits are gets by mathematical

calculation, total revenues - total costs = profit. Total revenue calculated as the price of the

product(housing) X the quantity sold. If we sell 1,000 units product in RM 1.00 our total

revenue will be RM 1,000. If we sell1,000 units product in RM 2.00 our revenue will be RM

2,000. In fact we will earn more RM 1,000 in RM 2.00 compare to RM 1.00. In conclusion

price of the housing increase, the quantity supplied also will increase.

First determinants are cost of production, a cost of a production increase will lead

the profits decrease, and the quantity of supply will decrease as well. It will lead thesupply

curve shirt to the left. The costs include costs of labor, costs of resource, and costs of capital.

Second, when we consider demand the one of the determinant was population. There

are same in supply view, one of the determinants of supply is the total number of sellers

available in the market. When the numbers of seller increase, the supply will increase and will

cause the supply curve to shift to the right.

Third determinant is substitution in supply, a substitute product provided by the same

seller. If the prices of substitute housing increase, the supply of the housing will decrease and

directly cause the supply curve shift to the left.

Lastly, expectation is one of the determinants in supply as well. If seller expects

the price increase, the supply of housing also will decrease because they want to earnmore, so

they will keep the housing and resell at higher price. This will cause the supply curve shift to

the left.
e) Discuss whether it is possible to prevent the prices from increasing too much to make houses

more affordable to the people.

The price houses in Malaysia is increasing every single moment. The implementation

of GST did not help in decreasing the house prices, instead it makes the price higher. The

construction company said that their supplier rise the price of raw material. Therefore they have

to rise the house price to cope with the cost of production and gaining profit. With the rise of

house prices, people in Malaysia are having problem in obtaining their own house and have to

rent for the rest of their life.

However, there are several ways that can be done by Malaysian government, as well as

Malaysian citizen so that the price of the house would not be too high. The first possible way

is, stop or reduce the ownership of second home. This way can be implemented by the

government in order to reduce the house prices. When each citizen of the country can only have

one or 2 houses, the people who have more buying power to purchase more house will have to

obey. The scenario that happen now is, rich people will buy more than 1 house in order to rent

them or either sell them in a higher price compared to the time they buy. The worst case happen

when they buy the low-cost price and rent them or make it as a homestay. It is unfair to people

who really need to have their own house for their family and to make it worse, they can’t afford

a high cost houses. If stopping and reducing the ownership of house can be done by the

government, the demand of houses will be reduced a little as the chance of people with

moderate income can buy them instead of the rich people. The law of demand stated that, if the

demand is reduced, the price will have to be reduce. Ceteris peribus.

 The second way is to give a subsidies to Malaysian citizen on the house loan or

reserve part of the land to certain group of citizen. This have to be done by the government

as well. Today, Malaysian government had lunch a ‘PR1MA’ project which providing a

moderate-cost house to Malaysian citizen who have a household income below RM6000 a

month. This is one example that could help reduce the price house because more people will

apply to buy houses under this project. However, it is still not enough as the project scope just

cover big city like Kuala Lumpur, Pulau Pinang and Johor. Government have to intervene more

by giving more subsidies or adding more reserve land to people with low income.

The third way is, government also have to make a quota of house to foreigner.

Nowadays, especially in Johor Bahru, more and more foreigner especially Singaporean bought

houses in Johor land. Sometimes, they even use Malaysian’s name in order to buy the house

which cost low compared to their currency. This phenomena cause a negative impact to

Malaysian citizen as the construction company only care about the profit. Therefore, many

Malaysian citizen lose the opportunity to buy the moderate or low cost houses. Government

have to keep a close eye and implement a rule like what have been done by Johor local

government to the property company in Johor. The local government make a rule stated that

foreigner can only buy a house which cost 1 million. More or less, this can reduce the foreign

buyer and help Malaysian citizen to buy houses at an affordable price. Government can make

a quota each project launched by the property company where only 10% of the overall house

offered can be bought by the foreigner while the others to local citizen.
 The fourth and last way is rent control. The federal government must control the rent

price by considering the land price and house condition. Nowadays, the owner of the rent house

simply state a high amount of rent to their rental as they wish. Sometimes, the rent price are

too much and they even renovate the house so that it can be used by many people. This scenario

can be seen in the universities area where the rent owner will renovate the house so that it can

fill more than 10 student at one time while the rent charge is still high. Forced by the factor

which the student have to stay at house near the campus, they had to rent there. Therefore,

government have to control the rent price of the rent houses so that the owner can’t simply ask

for high payment as they wish. How can this help controlling the house prices? It can be done

when the owner of the rental houses think they can’t have a high rent price, they will tend to

sell the house. At the same time, this help the citizen especially student from being oppressed

by other people who are greed of money.

Contribution:

Question a): ANIS HANEEM SHAHIRAH BT MAZLAN (4144009941)

Question b): NAVITHA SRI A/P MUNIANDY (4144009531)

Question c): NURUL ATIEKAH BT OZMAN@AZMAN (4144001041)

Question d): UMAIROH AL-HABIBAH BINTI MOHD FUAD (4144005501)

NURUL SHAHIRAH BINTI ZULKIFLE (4144003471)

Question e): AISHAH BINTI SAMAN (4144009381)

Reference:

1. Abd Wahab, Nur Huda, et al. Economics Theory in Malaysian Context. Singapore:

Cengage Learning Pte Ltd, 2010.

2. Vengedasalam, Deviga and Karunagaran Madhavan. Principle of Economics. Shah

Alam: Oxford Fajar Sdn.Bhd, 2010.

3. management, iproperty. houses in serdang area. Serdang, 8 April 2015.

4. group, iproperty. "iproperty group limited." 2015. iproperty.com. 3 April 2015.

<http://www.iproperty.com.my/property/searchresult.aspx?t=S&gpt=T&pt=2T&st=K

L&ct=Serdang>.

5. Interview: Saman, Haryati. regulation for foreigner to buy houses in Malaysia Aishah

Saman. 30 March 2015.