By Chee Jo-Ey
HOUSEHOLD debt is often attributed to the old tale of cost of living outpacing wages. The Covid-19 outbreak is only going to make matters worse. So, what is the current lowdown on our household debt situation?
According to Bank Negara Malaysia’s recently released Financial Stability Review for Second Half 2019, overall household debt remains elevated and recently edged higher, driven by loans for the purchase of residential properties.
According to Malaysian Institute of Economic Research senior research fellow Dr Shankaran Nambiar, the fact that costs of housing and living are going up and that wages are not increasing in tandem are contributing to household debt. Credit cards are also relatively easy to acquire though more recently, there are some holds on credit card approvals.
“Now with the Covid-19 outbreak, I would expect household debt to go up further since incomes will be going down. So long as we can prevent the issue from getting out of hand, we should be happy. Loan repayments should be given some flexibility, probably deferment in these difficult times,” said Nambiar.
While the economic impact of Covid-19 has increased risks to financial stability, temporary relief measures implemented to support households and businesses are also expected to limit credit losses and help preserve the debt servicing capacity of households and businesses as the economy recovers.
Most households are able to comfortably service their debt, with growth in household financial assets continuing to outpace that of debt.
Risks from household debt exposures remain concentrated among borrowers with monthly earnings of less than RM3,000 and housing loan borrowers with variable income who are more vulnerable to financial stress.
The share of borrowers from the vulnerable income group has continued to decline to 17.6% of total household debt, while the exposure-at-risk for housing loan borrowers with variable income remained low at 2% of total banking system loans.
The six-month moratorium on loan repayments and cash transfers by the government to support households affected by Covid-19 should help households in managing their debt in the current environment.
Some signs of easing in underwriting standards continued to be observed in 2019 but this has been mostly confined to lower-risk borrowers. Banks are well-positioned to continue supporting household lending activities which, in turn, will mitigate current macroeconomic risks. However, appropriate vigilance over lending standards will continue to be important to avert excessive debt burdens on households which could hurt future consumption.
University of Malaya faculty of business and accountancy senior lecturer Dr Eric Koh said: “The high ratio is, I think, due to both the high debt level and perhaps the low average income levels. We tend to attribute the former to (at least) the apparent high cost of housing. We also see many discussions on the latter being attributed to the country being caught in the middle income trap.”
To some extent, considering that land is a scarce resource, we can't totally avoid the increasingly high cost of housing. But perhaps we can reduce the impact by spreading out development to other parts of the country beyond the highly concentrated Klang Valley and a few cities. This may be done through proper planning, improved infrastructure and provision of incentives.
Besides, the authorities may consider making it easier for first-time owners to purchase a home. The government can engage in constructive conversations with both property developers and home owners to see what can be done.
“On the gross domestic product or income aspects, we should work towards value-adding and truly moving up the value chain. Some of those who work very hard and contribute a lot may find it frustrating that their salaries don't seem to commensurate with their contributions. This may lead to a brain drain.
“So, it’s important to create a situation whereby we’re able to reward people proportionate to their contributions rather than needlessly rewarding people who aren't really contributing as much,” said Koh. -- April 13, 2020