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The red line of household debt

  • The authorities must closely monitor the situation of fast rising household debt, especially in the housing sector.

Sin Chew Daily

Malaysia's household debt has been hovering at more than 80% of the country's GDP in recent years. Currently it stands at 82.1%.

According to Bank Negara, such a level is still manageable. Nevertheless, we must take note that more Malaysian families are now experiencing difficulty in settling their debts, and this should sound a warning bell to the authorities.

More families are now spending their disposable incomes to repay their debts, and the situation does not allow us to be any more optimistic if we look at things from this angle.

Statistics show that many Malaysian families spend over 40% of their disposable incomes on debt repayment, some even more than 50%!

This means that after servicing their debts, they are left with not much for daily necessities, food and education for their children.

And lest we forget, we still need to build up reserves in case of emergency.

A big chunk of Malaysia's household debt comes from housing mortgages, followed by car loans, personal loans, credit cards and other forms of borrowings.

For so many years our banks have been extremely generous in lending out money, and this has resulted in many Malaysians weak in financial planning overburdened with all sorts of unnecessary debts. These debts do not include borrowings from illegal channels. The consequences for failing to settle debts owed to loan sharks are unimaginable.

Property loans have peaked, thanks to skyrocketing house prices, very low or negative interest rates and speculative buying activities.

Currently there is a huge disparity between property prices and loan repayment ability of Malaysians, meaning the ratio of house prices to acceptable levels of household incomes is increasingly wider, eventually accentuating the situation of non-performing loans.

Automobiles have become a necessity for Malaysians with very low downpayment thresholds but relatively long repayment periods. Often when a car loan is fully settled, it is also time to change a new car.

According to Bank Negara, some 52% of Malaysians have difficulty taking out even RM1,000 for emergency use, and among ten people in employment, three will need to borrow to acquire daily necessities.

Additionally, out of five in employment, one has not had any net savings during the past six months!

All these point to a bleak scenario of the current financial status of many Malaysians.

The ratio of household debt to GDP will keep rising if more Malaysians need to borrow to support their consumerism needs, which is a very unhealthy phenomenon.

Increase in consumerism must be supported only with increase in productivity, wages and household incomes, not uncurbed borrowings.

Such a situation will not be sustainable. If interest rate goes up, the national economy is sluggish and average wage growth is stagnant, the debt issue will inevitably snowball into a major crisis.

While borrowings may stimulate the economy, do bear in mind that if we spend most of our disposable incomes on loan repayment, our purchasing power will be significantly weakened, and this will in turn bog down the country's economic progress.

Although we have not touched the red line yet, this is one thing that warrants the serious attention of us all.

It is imperative that the authorities closely monitor the situation of fast rising household debt, especially in the housing sector.

In addition to policies to control property prices, the government must also map out more people-friendly public housing policy so that more people can afford to have a roof over their heads.

The government is currently drawing up a bill on consumer credit to protect the interest of consumers and encourage a healthier credit market. The government is also mulling to introduce financial planning curriculum in schools, which indeed is a positive move.

However, it is even more important for the government's financial management mindset and other relevant policies to be put on the right track so as to avert any unnecessary negative effects on the country's economy.

 

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