If one assumes that property prices will increase in direct proportion to rising construction costs, such a view may be overly optimistic. The relationship is not necessarily linear, the answer can be either “yes” or “no.” Even in situations where prices do rise, the magnitude of the increase is influenced by multiple other factors.
Agility Valuers & Property Consultants would like to share the following insights.
What Caused the Recent Increase in Construction Costs?
Recent geopolitical tensions particularly the US/Israel–Iran conflict that escalated towards the end of February have involved airstrikes on Iran, followed by retaliatory missile and drone attacks on US bases and allied targets.
Although this remains a regional conflict, disruptions to key global oil routes, especially the Strait of Hormuz, have significantly affected global oil supply and pricing.
The immediate consequences include:
Increased petrol and transportation costs
Higher operating costs for businesses, which are passed on to consumers
Broad-based inflationary pressure
These developments have both direct and indirect implications for the construction sector, including:
Rising material costs
Higher logistics and transportation expenses
Given these factors, it is understandable that many may conclude property prices will increase accordingly. However, this conclusion requires deeper examination.
How Are Property Prices Determined?
As with most goods in an open market, property prices are determined by the interaction of demand and supply.
Market prices are established at the equilibrium point, where demand meets supply. Neither demand nor supply alone serves as the sole determinant of price; both must be considered together in assessing market movements.
What Happens to the Supply Side When Construction Costs Increase?
Primary Market (New Developments):-
As construction costs rise, including materials, labour, professional fees, and statutory compliance costs, developers are compelled to increase selling prices in order to preserve profit margins.
Consequently:
Newly launched developments tend to be priced higher
However, such pricing is sustainable only if the market has sufficient purchasing capacity to absorb it
Secondary Market (Existing Properties):-
In the secondary market,
Property owners may raise asking prices in response to higher pricing of new developments
This may exert upward pressure on overall market prices
Supply Constraints:-
At the same time,
Higher development costs may lead to delays or deferment of new project launches
Developers may become cautious about take-up rates at elevated price levels
As a result, the number of available units in the market may decrease, potentially tightening supply and exerting upward pressure on prices over time.
However, this upward trajectory is conditional, it depends critically on whether demand remains sufficiently strong and buyers retain the ability to afford higher prices.
What Is the Likely Response from the Demand Side?
An increase in petrol prices has both direct and cascading effects across the economy.
Direct impact:
Higher fuel costs for consumers
Indirect (multiplier) effects:
Increased food prices due to higher transportation and fertilizer costs
Rising costs of manufactured goods and daily necessities
Higher prices for transport-related services
This creates a multiplier effect, whereby a relatively small increase in petrol prices leads to a disproportionately larger rise in overall living costs.
As a consequence, disposable income declines and consumers face greater financial constraints.
In response to inflation, Bank Negara Malaysia may raise interest rates.
This would result in, higher financing costs for property loans, reduced borrowing capacity and lower consumer and business spending.
Economic growth, measured by Gross Domestic Product (GDP), may slow. GDP is composed of CIGX:
C – Household consumption
I – Investment
G – Government expenditure
X – Net exports
In such an environment, both individuals and the broader economy become more cautious. Buyers may be less willing or less able to pay higher property prices.
Developers, therefore, may not be able to fully pass on increased costs to purchasers. Instead, they may delay project launches or accept lower profit margins.
Key Conclusion
While higher construction costs may provide justification for higher property prices, actual price movements are ultimately determined by demand and affordability conditions.
Construction Cost vs Property Price (2016–2025): Agility Valuers & Property Consultants Observations
At Agility Valuers & Property Consultants, we consistently emphasise that:
“Cost does not necessarily equate to value or price.”
Definition:
Cost (construction cost / development cost) is the amount developers spent to develop a property scheme.
It includes statutory payments to authorities such as title conversion and lease extension premiums, development charge, contribution to IWK, TNB, payments for survey and issuance of individual titles or strata titles; preliminary costs such as site clearance and earthworks, building construction cost, professional fees, contingencies, project management expenses, marketing cost, legal cost, finance cost, etc.
Value is the worth of a property based on its usefulness, benefits, or the future income it can generate.
Example: A property may have a market value of RM800,000 based on location and rental income, as ascertained by a registered valuer.
Price is the actual amount of money paid for a property in a transaction.
Example: If someone buys that property for RM750,000, then RM750,000 is the purchase price.
Based on our research:
High-Rise Residential Units
Construction costs increased from approximately RM160 psf (2016) to RM210 psf (2025), representing a 31% increase
However, secondary market transaction prices (Example Casa Desa in Taman Desa) declined overall, from RM541–RM633 psf (2016) to RM383–RM516 psf (2025).
Landed Residential Units
Construction costs increased from approximately RM105 psf (2016) to RM130 psf (2025), representing a 24% increase
Meanwhile, transaction prices for Bangsar Baru double-storey terrace houses showed a slight decline from the range of RM1.64 million – 1.95 million (2016) to the range of RM1.45 million to RM1.90 million (2025).
Conclusion
Property prices in the secondary market have moved in the opposite direction to construction costs.
This reinforces the principle that market value is driven by demand and supply dynamics, rather than cost alone.
(It is also worth noting that if completed and ready-to-occupy units are available at lower prices, the ability to price new launches at higher levels may be constrained. Unless developers offer enhanced concepts, facilities, or quality, which in turn increases overall development costs.
Case Study: Affordability Impact
Agility Valuers & Property Consultants present the following comparative scenario:
Before Price Increase:
Gross monthly income: RM10,000
Net income (after EPF and Income Tax): RM8,000
Property price: RM500,000
*Monthly instalment: RM2,451
(Loan margin 90%, interest rate 4.3%, loan tenure 25 years – monthly instalment is RM2,451)
Total monthly expenses: RM4,500
(car instalment RM1,000, household expenses RM2,000, kid education RM500, others RM1,000, totaling RM4,500)
Net savings for contingencies and investment : RM1,049
After Price Increase (10%):
Property price: RM550,000
Interest rate: 4.55%
Monthly instalment: RM2,766
(Loan margin 90%, interest rate 4.55% after an increase of 25 basis points, loan tenure 25 years – monthly instalment is RM2,766)
Total monthly expenses: RM4,900
(car instalment RM1,000, household expenses RM2,200, kid education RM600, others RM1,100, totaling RM4,900)
Net savings for contingencies and investment: RM334
Observation
Despite only a 10% increase in property price, the household’s financial position deteriorates significantly, highlighting a clear affordability constraint.
This raises critical considerations:
Should buyers proceed with property acquisition?
Should they opt for smaller or lower-priced units?
Should they defer purchase and rent instead?
If a significant number of potential buyers adjust their decisions, this will materially affect demand and consequently, property prices.
Policy Consideration: Petrol Subsidy
Agility Valuers & Property Consultants invite further discussion on the following:
Could governments offset rising petrol prices through subsidies funded by increased export revenues from petrol?
Is it feasible for governments to fully absorb such increases to stabilise the economy and avoid multiplier effects?
While stabilising petrol prices may reduce inflationary pressure and benefit the broader economy, there are trade-offs:
Artificially low prices may lead to inefficient resource allocation
Increased consumption may result in wastage
If governments intervene to maintain petrol prices at artificially low levels, the economy may benefit in the short term by mitigating inflation and its multiplier effects. However, such measures may also introduce inefficiencies and unintended consequences.
Your thought?
Frequently Asked Questions (FAQs)
Does an increase in construction costs always lead to higher property prices?
Not necessarily. While higher construction costs may justify higher selling prices, actual property prices depend on market demand and buyers’ affordability. If demand is weak, prices may remain stagnant or even decline.
Why have construction costs increased recently?
Construction costs have risen mainly due to higher oil and transportation costs, partly influenced by geopolitical tensions affecting global supply routes such as the Strait of Hormuz. This has led to increased material costs and overall inflation.
How do higher construction costs affect the property supply?
Higher costs can:
Increase prices of new developments
Delay or reduce new project launches
Limit the number of units available
This may reduce supply, which could push prices up, but only if demand remains strong.
How do rising costs impact property buyers?
Rising costs lead to:
Higher living expenses
Reduced disposable income
Higher loan repayments due to possible interest rate hikes by Bank Negara Malaysia
As a result, many buyers may delay purchases, downgrade their property choice, or opt to rent instead.
Can government subsidies on petrol help stabilise property prices?
Subsidies may reduce inflation and ease cost pressures in the short term. However, they can also lead to inefficiencies and overconsumption. Ultimately, property prices are still driven by demand, supply, and affordability, not subsidies alone.
———————————————————————————————————————————————————————
This blog / insight is based on Agility Valuers & Property Consultants / Agility Research (AVPC)’s current understanding and insights about the related topic in the current property / real estate market context. Agility Valuers & Property Consultants / Agility Research (AVPC) makes no guarantees, representation or warranties of any kind, expressed or implied, regarding the information including but not limited to, warranties of content, accuracy and reliability. Interested parties should undertake their own inquiries as to the accuracy of the information. Agility Valuers & Property Consultants Sdn. Bhd. / Agility Research (AVPC) excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss or damages arising therefrom.
Neither the whole nor any part of our blog or insights may be included in any published document, circular, prospectus or statement, nor published in any way without the prior written approval of Agility Valuers & Property Consultants Sdn. Bhd. / Agility Research (AVPC). We shall not be obligated to update this blog / insight in response to changes in market conditions or the regulatory environment subsequently.
For more information, please contact:
Sr Yap Kian Ann
Tel: 603-9544 2694 Email: yap@agilitymy.com
HP : 6012-378 5811 Website: www.agilitymy.com
All Rights Reserved
Copyright © 2025 Agility Research
