Expect the unexpected: housing price bubble on the horizon in Malaysia

The growth of financial market has taken centre stage in today’s world economy. It takes a quarter of a second to change the whole dynamics of an economy. The moment an asset price bubble and burst occurs, the whole economy may collapse. This paper makes an attempt to investigate the existence of housing price bubble by taking Malaysia as a case study. In Malaysia, the housing market is in its boom, naturally housing prices are sky high. There is no consensus in the literature about what is a housing price bubble. The method applied in this study are the standard time series techniques of cointegration, long-run structural modelling, vector error correction, variance decomposition method. To our knowledge, this is the first study on housing bubble based on demand and supply side variables, for a period of 17 years of data. Our findings tend to indicate that variables are cointegrated and market tends to correct any disequilibrium that exists over time. The results also imply that house prices are on the rise. The policy implications are that, though housing prices bubble and burst are not imminent, the upward pressures on housing prices, might require more sustainable measures within the current housing boom period.