THE rapid increases in real housing prices since 2008 could be a source of future instability, according to the World Bank’s latest Malaysia Economic Monitor report.

The report said increases in housing prices can relax borrowing constraints and allow existing homeowners to increase consumption, thereby boosting the economy. 

“However, the rapid increase in prices creates incentives for the construction of new properties, which could potentially lead to a burst in prices and an abrupt adjustment to economic activity.

“This risk warrants close monitoring, especially since prices are still increasing, albeit at a lower rate,” said the report, which was published on Thursday. 

The World Bank said relatively high food price inflation over the past years, combined with the rising costs of housing, have had a disproportionate impact on lower-income earners, particularly those in urban areas, who spend proportionately more on these two items. 

The inflation rate is expected to stand at 3.9% in 2017.

The Malaysian economy also continues to face downside risks to growth related mainly to the relatively high level of household and public-sector debt. 

The report said despite a recent decline, Malaysia’s high level of household debt in proportion to GDP in the context of persistent property market imbalances continues to pose a risk to the maintenance of macroeconomic and financial stability. 

“This could also have an impact on private consumption if prices increase, particularly as domestic financial conditions are likely to tighten as a result of Bank Negara Malaysia’s monetary policy normalisation measures.

“In terms of public sector debt, while the level of federal government debt has declined over the recent years, contingent federal liabilities remain relatively high, presenting a potential source of medium-term fiscal risks,” the report said. 

The World Bank also said political uncertainties related to Malaysia’s next general election, which is scheduled to be held by August 2018, may lead to some near-term financial market volatility.

There is also a growing shift towards protectionism, which could have a dampening effect on global trade and investment flows, with disproportionate adverse spill-overs on Malaysia, given its high level of integration with the global economy and financial markets. 

“Within the developing EAP (east Asia-Pacific), heightened geopolitical risks, mainly related to an increase in tensions in the Korean peninsula, could have severe economic implications for regional economies if these tensions escalate.”

Other significant downside risks include a disorderly adjustment to global financial market conditions, weaker-than-anticipated growth by Malaysia’s major trading partners, including China, and/or renewed decline in global commodity prices and export demand if cyclical factors diminish. 

“Conversely, a stronger-than-expected recovery in the advanced and emerging market economies could lead to continued strong demand for Malaysia’s exports.” – December 18, 2017.