Academic journal article Journal of Real Estate Literature

The Impact of the Asian Financial Crisis on the Pricing of Condominiums in Malaysia

Academic journal article Journal of Real Estate Literature

The Impact of the Asian Financial Crisis on the Pricing of Condominiums in Malaysia

Article excerpt


This study found that the pricing of condominium units in Malaysia became more rational after the Asian Financial Crisis (AFC). Analysis of condominium transactions in Penang suggests that the same set of housing attributes explained more variation in prices after the AFC. This suggests that there were more noise trading activities in the market before the AFC. One of the few positive effects of the AFC is the reduction in the number of noise traders in the property market. In addition, the results also suggest that larger units suffered a greater decline in price then smaller units after the AFC.


The financial crisis that hit Asia in July 1997 had significant economic and social impacts throughout the region. Many newly industrialized countries, namely Indonesia, Taiwan, Hong Kong, Korea and Malaysia, suffered severe problems that had a devastating effect on their economies. For example, the economy in Malaysia, which, on average, had grown 8.7% annually for the ten years prior to the crisis, experienced a negative growth of -4.8% p.a. during 1998 (Usilappan, 2000).

The construction and property sector in Malaysia, which had grown rapidly in the 1980s, also encountered problems during the crisis. Records showed that Penang was the worst hit state during the crisis in 1998 (Usilappan, 2000). During the period 1995-1996, there was a massive increase of over 600% in the number of condominiums built in Penang (Geh, 2000). However, during the crisis, there were thousands of unsold condominiums. Many housing projects had to be abandoned. The situation became so serious by the first quarter of 1998 that the government initiated a "Home Ownership Campaign" nationwide to stimulate growth in the home ownership sector. This scenario is in stark contrast to the situation before the Asian Financial Crisis (AFC). Prior to the crisis, prices of condominiums soared rapidly. The High-Rise Unit Price Index for Penang compiled by the Valuation and Property Services Department increased from 77.9 in 1988 to record high level of 170.8 in 1997.

This study analyzes the impact of the AFC on the housing market in Malaysia using a hedonic pricing approach. Condominium prices in Penang were used for analysis because of the homogenous nature of its condominium units. Exhibit 1 shows the position of Penang in Malaysia.

Literature on the hedonic pricing approach indicates that prices of properties are linked to the preference for particular housing attributes. In fact, numerous empirical studies have been conducted to examine the relationship between attribute preference and the price of properties. However, to date, no empirical studies have been undertaken to compare buyers' preference for properties' attributes during property "booms" and "busts." The results should be of interest and useful to real estate appraisers, developers, urban planners and policymakers.

The Hedonic Price Model

Extant literature shows that the hedonic pricing model, developed from the works of several scholars, including Lancaster (1966), Rosen (1974) and Freeman (1979), has hitherto been extensively used to study the attributes affecting the price of products, as well as the marginal contribution of each attribute.

The partial derivative of the above hedonic function with respect to any attribute is the marginal change in the valuation of the property, ceteris paribus (Rosen, 1974). The hedonic pricing approach employs the regression technique in order to estimate the implicit prices of the properties. These implicit prices of the housing attributes are revealed in the regression coefficients (Rosen, 1974; and Freeman, 1979). Under the assumption that there is an equilibrium of demand and supply for the housing attributes, the implicit prices that are revealed indicate the buyers' valuation of each of the attributes. Hence, the price of the property is the sum of the implicit prices for each of its attributes. …

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