Is Malaysia's Real Estate a Good Investment During Times of Inflation?

Inflation, it's a term we hear often when people talk about the economy. But what does it actually mean for you, and how can real estate investing be an effective way to hedge against it?

What is Inflation?

In simple terms, inflation can be defined as a general increase in prices and fall in the "purchasing value of money".

When inflation rises, the value of your money goes down and you need more money to buy the same items. Essentially, your money doesn't go as far as it used to.

If you had RM100 saved in the bank a year ago, it won't buy as much today because of inflation. You are likely to have felt the effects of this, often by realising how expensive most items have become in recent years, whilst wages have certainly not increased in the same way!

A real-world example: The price of nasi lemak over time

One simple way to visualize inflation is by looking at the cost of everyday items. A packet of nasi lemak that cost RM2.03 in 2011 now costs RM3.68 in 2024, that's an 81% jump.¹ For more on how inflation impacts your savings, check out our previous article on staying ahead of inflation.

How is Inflation Measured?

Economists use the Consumer Price Index including owner occupiers' housing costs (CPI) as a lead measure to track inflation. This index measures the average change in prices for a 'basket' of goods and services over time.

In Malaysia, the Department of Statistics Malaysia (DOSM) tracks the prices of 552 items across categories like food, housing, and transport.² They collect prices from roughly 22,000 retail outlets nationwide, weekly for items like vegetables, monthly for things like clothing, and quarterly for rents.³

The Malaysian Inflation Crisis

So now the question is: what causes inflation?

Over the past two decades, several major events have shaped Malaysia's inflation crisis. The economy has faced volatility from global financial shocks, political transitions, the pandemic, and subsidy reforms.

Why is Malaysia so vulnerable to inflation?

One major issue is that as a country, Malaysia relies heavily on imports. We import over RM78.8 billion worth of food annually, that's items like beef, mutton, and even chilli.¹⁰ When global food prices rise or when the ringgit weakens, we can't fully insulate ourselves from higher costs.

The ringgit has been on a rollercoaster. It weakened from RM3.16 per USD in 2008 to a record low of RM4.77 in February 2024.¹¹ Every time the ringgit drops, imported goods become more expensive, from the cooking oil at your local kedai runcit to the petrol you pump at the station.

So when global events like the Ukraine war or pandemic supply chain issues happened, the shortage of supply might have driven up prices because it was unable to meet the demand. This causes high inflation in Malaysia.

How Does Inflation Affect Real Estate?

Housing prices growth

Real estate prices in Malaysia have increased significantly over the last 25 years.

Why is that? Well, in the 21st century, a growing number of people are earning enough to buy their own property. But what hasn't changed is the land to build them.

Fun fact: Malaysia's population has nearly doubled from 18.4 million (1991) to 34.5 million (2025),¹² yet land available to build houses on has not!

Moreover, real estate is a notoriously slow business, where houses take months to build on average, and once you own a house, you are unlikely to move to a new place. With the sky-high demand nowadays, the supply of housing has been unable to keep up, which has contributed to a housing shortage, pushing up demand and prices.

Furthermore, inflation generally drives up the prices of all commodities, including the raw materials needed for construction. As the cost of materials like cement and steel rises, so does the expense of building new homes, a cost that's typically passed on to the buyers.¹³

Change in house prices vs. inflation

As exhibited in the graph above, it is quite evident that Malaysian housing prices have generally performed better than inflation in the long run, despite the short-term fluctuations.

The real estate market has experienced a few dips in growth, most noticeably in 2008 and during the 2020-2021 COVID-19 period. The first instance was of course the 2008/09 financial crisis, and the second was the recent pandemic when Movement Control Orders severely restricted economic activity.

Apart from these significant dips, in recent history, the real estate market has consistently matched or exceeded inflation rates over the years, with a peak difference of over 14% in December 2012.¹⁴

In early 2024, we saw property prices rise modestly while inflation remained low. While this may have seemed concerning at the time, history has shown that housing prices tend to recover from such downturns. True to this pattern, we are now witnessing a recovery. As of late 2024, housing prices have bounced back, rising above inflation by 1.5%. After a downcycle that began in late 2022, the market is showing signs of renewed growth.

These shifts highlight the cyclical nature of real estate and the opportunities that arise during downturns. Those who invested during the dip are now seeing the early rewards of market recovery.

To help you understand this, we're including a graph on Malaysian average house prices below:

If you had purchased a property during the 2008 financial crisis in March 2009, since the average house prices have increased from roughly RM230,000 to RM494,000, you would have achieved approximately 4.3% annualized return on your investment.¹⁵

This means that real estate prices have outperformed inflation by an average of 2.2% on a yearly basis since 2009.

House prices in the last two decades have significantly increased and are expected to continue doing so, making real estate a potentially great investment tool to outpace inflation.

Rental income

A feature that stands out about the real estate market is rental income. When a tenant agrees to rent your property at a fixed rate, it provides an assured and passive income source, which isn't readily available with other investment methods.

When the inflation rate is high, the rental market usually tends to follow suit, but with a noticeable lag. This is usually because of the fixed lease agreements for a certain time period. For example, if the inflation rate suddenly increases, the landlords won't be able to increase the rent instantly due to the fixed agreements. However, usually within a one-to-three-year period, you can see some rental adjustment based on market conditions.

Over the past 25 years, the relationship between rent and inflation has shown that rents tend to track inflation reasonably well in the long run, though the correlation isn't perfect.

From 2011 to 2024, rental prices have generally kept pace with or exceeded inflation. Looking at a broader historical perspective, the gap is even more pronounced. Rental yields in Malaysia currently range from 3-6%,¹⁶ providing property investors with steady income that helps offset inflation's impact.

No doubt, there have been times when inflation exceeded rental prices; however, the overall trend shows that rent prices tend to beat inflation in the long run.

How Can Real Estate Protect You from Inflation?

Let's compare what would've happened if you had invested RM100 in real estate vs. if you left it in a bank account (current account) in the year 2000.

For your investment in a Malaysian property, the capital value would have increased to roughly RM337 based on house price growth of 237% since 2000. But that's just capital appreciation, when you add rental income averaging 3.5% per year over 25 years, your total returns would push the value significantly higher, potentially to RM750-920 depending on rental yield and reinvestment.

On the other hand, if you had simply saved your money in a conventional savings account earning minimal interest (around 0.75% annually), the RM100 would still be RM100 in nominal terms. But here's the problem: due to cumulative inflation of 70% since 2000, that RM100 now has the purchasing power of only RM59 in year-2000 money. That's a loss of about 41% of its real value.

For Malaysia's Muslim majority, the situation is even more challenging. Islamic savings accounts can't use conventional interest, so even Islamic fixed deposits, which are halal but typically offer returns of 2.5-3.8%¹⁷, struggle to keep up with inflation during price spikes. Over the long term, your savings barely hold their value, let alone grow.

This should make you realize how important it is to grow your wealth, instead of saving it. The money you worked so hard for 25 years ago has lost much of its value today. Without investing it, you're essentially wasting your efforts to build wealth.

Some Other Benefits of Real Estate

Tangible asset

Unlike many other financial assets, real estate is tangible, meaning that it has inherent value. Housing is used by people to eat, sleep, pray and more, so it will always hold value regardless of the market conditions. This means that in times of economic instability, real estate is often one of the few asset classes that is not as drastically affected.

Diversification

Since real estate is a different market to stocks and other investments, it makes it a great way to lower your overall investment risk when your other investments are not doing well as real estate is not co-related to other investment vehicles. Especially during inflation, stocks and other financial instruments are likely to fall in value, unlike real estate.

Tangible improvements

Along with being tangible, housing can be improved in value with renovations and refurbishments. These improvements can increase the value of the property by an additional 15-30% depending on the nature of upgrades.

Why Wahed?

We strive to acquire properties at below-market prices with the help of our network of real estate specialists. By doing this, we aim to ensure that your investment is protected against any potential downturns or inflation.

For example, for a property with a market value of RM500,000, Wahed might secure it for RM450,000. Even in the rare event of inflation rising by up to 8% or the real estate market dropping by 5%, the cushion provided by the discount could mean that your investment will be protected against inflation. Though it's not a guarantee, it does offer some protection in fluctuating economic conditions.