Real estate prices in Malaysia have risen steadily over the past five years. Is supply failing to meet demand, or are prices rising due to speculative buying by locals and foreigners? Prices are expected to continue rising due to rising construction material costs, labor shortages and the introduction of the Goods and Services Tax next year. Buyers from Singapore, Hong Kong and even China are interested in some local projects, especially the real estate market in Penang and Iskandar (Johor). This may be due to already high real estate prices and cooling in these markets, as well as the relatively low interest rate environment of the past few years. The value proposition is enhanced by Malaysia’s relatively affordable property prices and its appeal as an alternative to retirement living or as a cheap holiday home. Some Chinese buyers also view Malaysia as an ideal place to educate their children due to cultural similarities and the advantages of bilingual education. Strict government controls on foreign home ownership and the ease of lending by Malaysian banks are also driving the market. The recent tightening of bank lending rules has made it more difficult for the average local buyer to obtain a loan, especially if they already have an existing loan. The increase in RPGT from 2014 also makes flipping less attractive for short-term speculators. However, prices should continue to remain stable as long as the economy grows on the back of a U.S. economic recovery and prohibits any external shocks from Malaysia's major trading partners such as China. Rising U.S. interest rates could push lending rates higher, which could have a dampening effect on prices as banks rebalance their home loan exposure if soured home loans lead to foreclosures. However, tighter home loan lending rules have partially mitigated this risk. The recent decline in global oil prices should spur domestic consumption growth and sustain economic growth for the foreseeable future. Rising labor and production costs as China shifts to higher value-added industries should see some products shift to Malaysia. Foreign direct investment in Penang has increased significantly to record levels in recent years, thanks to its pro-business state government. In short, inflation from macroeconomic factors, a young and growing population, and healthy demand for housing in a market that remains relatively among the most affordable and liveable cities in Asia will drive property prices over the next 2-3 months A year of healthy growth for the month. /zd/ym