Page 270 - Special Topic Session (STS) - Volume 3

STS543 Muizz A. et al.
2. Background and Stylised Facts
Household debt in Malaysia stood at RM1,188 billion, or 82.1% of GDP as
3
at end-2018. The current elevated state of household indebtedness in
Malaysia is preceded by a period of rapid debt accumulation. The annual
growth of household debt hovered around 10% to 14.2% between 2008 and
2013, significantly above income growth. This trend was primarily driven by
loans for the purchase of residential properties and personal use, which
accounted for 52.3% and 14.5% of household debt, respectively, as at end-
2018 (2008: 48.4% and 10.6%, respectively) (Chart 1).
The acceleration in the growth of residential property loans coincided with
the spurt in house prices. The annual growth of Malaysian House Price Index
(MHPI) increased from 5.6% in 4Q 2009 to 14.3% in 4Q 2012 (peak) (Chart 2).
The MHPI trend during this period could be attributed to, among others, more
relaxed credit underwriting practices of some lenders, increased speculative
activities under an environment of low interest rates and inflation, tax regime
that was less punitive to speculators (e.g. low Real Property Gains Tax), and
the continued strong demand for residential properties especially in urban
areas such as Kuala Lumpur, Selangor and Johor Bahru.
Meanwhile, the growth of personal financing largely reflected the
increasing role of non-bank financial institutions (NBFIs) in providing financing
to households, coupled with aggressive marketing and advertising strategies
by both banks and NBFIs to attract customers. This includes development
financial institutions, which lent heavily to the low-income group. On the
demand side, sustained income growth bolstered households’ confidence and
shaped optimistic expectations on their future incomes, which subsequently,
incentivised households to borrow in order to smooth their consumption over
the life cycle.
Against this backdrop, the aggregate leverage (measured as a ratio of
outstanding debt to annual income) of individual borrowers in Malaysia stood
at elevated levels. A closer look at the leverage ratio by income group revealed
a stark difference, with the low-income borrowers (those who are earning
<RM3,000 per month) being more vulnerable to financial distress given higher
leverage of 8.8 times as at end-2018 (Chart 3). This group also held the largest
share of personal financing to their total borrowings, compared to other
income groups. Their conditions were further compounded by continued
reduction in housing affordability, as higher house prices require them to take
on bigger loan amount. Compared to other income groups, low-income
borrowers experienced the highest increase in house prices (Chart 4). Given

3 Malaysia’s household debt-to-GDP ratio remains high, compared to regional and rating
peers (Emerging market economies aggregate as at end-2018: 40%; Singapore: 67%; Thailand:
69%; China: 53%; Chile: 45%).

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