Reality check on debt mountain of Malaysian households

Saturday October 12, 2013 

Reality check on debt mountain

BY ALAN TONG KOK MAU

A YOUNGSTER came to me recently to seek views about his financial stress. He says the first thing he does when he gets his pay cheque is to repay loans, including a car loan, credit card payments and personal loan. Owning a house is on his wish list, but it is yet to be realised.

His case mirrors many similar situations faced by Malaysians nowadays, not only confined to the younger generation. It has become a concern to the authorities as our household debt ratio against the GDP (gross domestic product) has reached an all-time high of 83% as of March this year, the highest for a developing country in the region. In comparison, Indonesia’s household debt ratio stands at 15.8%, Hong Kong at 58%, and Singapore at 67%, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz’s comment recently.

While we are concerned about the high debt level, we should also take a closer look at the root cause. What is underneath the “debt mountain” and how can we address the issue?

The major components of household debt are housing, car, personal and credit card loans. According to Bank Negara statistics, as at April 2013, the total residential housing loans taken by Malaysians is RM316.2bil, passenger car loans amounts to RM145bil, personal loans stand at RM55.8bil, and credit card loans at RM32.3bil.

In terms of debt ratio for the four components mentioned above, housing loans account for 57.5% of the total debt, with car, personal and credit card loans accounting for 26.5%, 10% and 6% respectively (see chart).

As housing loans seem to be the biggest contributor to household debt, there are already several measures being put in place to cool the housing sector and to curb mortgage growth.

However, if we take further steps to scrutinise the breakdown of the loans, and study the interest incurred in absolute terms, and the appreciation or depreciation in value of the underlying assets, we will soon discover the source of the real burden.

Property is truly an asset, compared with a car, personal loan or credit card spending in which the value of the purchases depreciates over time.

According to the Malaysian House Price Index by the National Property Information Centre, the overall housing price in Malaysia has increased by an average of 5% every year since 2000. Thus, servicing a housing loan is like paying for “good debt” as the asset will gain in value in the long term and eventually protect us against the inflation.

On the other hand, based on car insurance calculations and accounting practice, the value of cars depreciates about 10% to 20% per year. This means that the car loan and interest is paid for item that is contracting in value every year, it is a liability instead of an asset.

In addition, based on our current structure, the average interest rate for housing loan is 4.2%. If we apply this rate across the board, the absolute interest incurred for RM316.2bil housing loan will be about RM13.3bil a year, which is only 43% in terms of absolute interest paid compared with its loan amount component of 57.5%. Whereas, personal loans which account for only 10% of the total household debt, would incur absolute interest of 22% of overall household debt due to its high interest rate of 12%.

As mentioned in some of my previous articles, the younger generation is advised to purchase a house instead of a car first. Let’s visualise this via the following scenarios.

Let’s assume a young couple which has a household income of RM6,000. The ideal mortgage (housing loan) repayment is always one third of the income, i.e. RM2,000.

After deducting RM2,000 from their income, they will still have RM4,000 household income available.

If the couple decides to own a car, the loan repayment, petrol, parking and maintenance fees are most likely to come up to RM1,000 to RM1,500 depending on the types of car they are getting.

This leaves the family with a household income of only RM2,500 to RM3,000 provided they are just owning one car instead of two.

With the same household income, if the couple decides to utilise public transport, the monthly transport expenses may be in the range of RM300 to RM400 for two persons. They will still have a household income of RM3,600 every month after paying for house loan interest and transportation cost.

To help lessen the debt burden of the rakyat, the authorities must accelerate the effort of providing comprehensive public transportation network including MRT, buses, mini buses and taxis, to reduce public dependency on private vehicles.

A total review on the cost of car and motorcycle ownership in Malaysia would also help reduce this debt burden.

For households that wish to reduce their debt level, they should avoid the temptation of instant gratification, and instead should place importance to assets that grow in value.

When we look in detail at the household debt level of the nation, it provides more insights than the headline number at first glance. Sometimes, it is as simple as to differentiate the “healthy” debt from the rest to make a significant difference in our financial position.

FIABCI Asia-Pacific Regional secretariat chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman ofBukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

The Myth of 'Good' Debt

By David Francis
Apr 27, 2012

The economic crisis and the tepid pace of the recovery have left millions of Americans deep in debt. And amid this slow recovery, many are struggling to make minimum payments to keep ahead of creditors.

The amount of debt the average American holds is staggering, compared with the average American salary. In its latest findings in 2010, the Social Security Administration calculated the average American wage index to be $41,673.83.

According to Creditcards.com, a website that tracks the credit card industry, the average American household holds $15,956 in credit card debt. The Census Bureau has determined than 60 percent of Americans own their homes; many of these people still owe money to a bank for mortgage payments. Estimates on the size of these payments vary, but most organizations say the majority of monthly payments fall between $700 and $1,700 per month.

[Related: Is A College Degree Worth It?]

On top of that, most Americans have to borrow money to buy a car. According to the auto website Edmunds.com, monthly car payments should average between 8 and 11 percent of monthly income, although many people pay more. College students are also forced to take out loans to pay for education. The Project on Student Debt has found that the average graduate of a four-year nonprofit university carries more than $25,000 in loans.

Based on these numbers, it seems almost impossible for the average American to be debt-free. But there are steep variations among these loans. Paying off some loans should be a priority. Others, while burdensome, can wait.

Better debt vs. worse debt.
Prior to the Great Recession, many financial experts differentiated between "good" debt and "bad" debt. The former included loans with low interest rates, such as a home loan. Because the value of a home presumably appreciated over time, the debt helped the borrower work toward building wealth. "Bad" debt included credit card loans, or loans taken out to pay for things that current cash reserves couldn't cover. The value of the product purchased with the credit card immediately depreciates upon purchase, while the money placed on the credit card immediately begins to accrue interest.

But according to David Bach, author of the Finish Rich book series and founder of www.FinishRich.com, the financial downturn changed these perceptions. "Good debt and bad debt is almost a myth that we were sold for 20 years," Bach says. "There's just debt. For the most part, debt is basically bad and difficult. It comes down to the interest rate."

Debt now seems to fall into two new categories: better debt and worse debt. Better debt is a loan with a low interest rate used to purchase something that adds value. Worse debt is used to buy a depreciating asset or debt used as a substitute for cash. A home loan, according to Bach, is an example of better debt.

"For the most part, most people have to borrow money to buy a home. The key is if you borrow money to buy a home, the faster you pay that loan off, the faster you're free," Bach says.

[Related: How to Use the IRS as a Credit Card]

The Catch-22 of debt is that one needs to go into debt to be considered a credit-worthy borrower with the ability to pay off large loans. Rod Ebrahimi, founder and CEO of ReadyforZero, a website that helps people plan to get out of debt, says establishing a good credit score is imperative for transitioning out of college. "A good debt you could have had through college is a credit card you had going into college and never carried a large balance," he says. "It may actually make sense to have some history."

However, Bach warns that this kind of debt can quickly become burdensome if the cardholder doesn't manage it responsibly. "If you're going to borrow money on your credit card, the goal should to be pay it off in full at the end of the month," Bach says. "Don't get stuck in the trap of paying minimum payments. Pay off these cards as fast as possible."

Making sound education decisions.
Ebrahimi says the growing student loan burden and the poor state of the economy, especially for young people, means students must approach student loans differently. They are often necessary, but one needs to be strategic in how they are used. He warns against using loans at for-profit universities, which promise much but often fail to deliver jobs that allow students to pay off their loans.

"At for-profit schools, you can get all kinds of degrees and you end up with six-figure debt, then can't find a job that allows you to pay them," he says.

He adds that loans should also be used strategically at nonprofit universities. "There can be good and bad students loans" at nonprofit universities, Ebrahimi says. "Many people believe they can pay at any university," but often, payments at state school are easier to manage.

http://finance.yahoo.com/news/myth-good-debt-170611202.html

Malaysian households are vulnerable to market volatility with one-third of household financial assets in the form of equity,

Private risk in market volatility

Written by Syarina Hyzah Zakaria
Monday, 21 November 2011 12:45


KUALA LUMPUR: Effective this Jan 1, those looking to borrow from banks to buy houses and cars will be subject to Bank Negara Malaysia’s (BNM) new guidelines aimed at promoting prudent, responsible and transparent retail financing practices.

While much has been documented about the high borrowings of Malaysian households, little has been said about the 33% of households’ financial assets that are in the form of equities and unit trusts, which makes them also vulnerable to market volatility.

Malaysia’s high proportion of household debt to GDP of 76% is already a well-known fact. Having targeted the credit card segment earlier by imposing fees and stricter credit limits, the central bank is now tightening the income criteria for mortgages, requiring eligibility to be based on net income rather than gross income as it was previously.

Not only that, effective last Friday the tenure for car loans is now capped at nine years.

Although much has been said about the high level of household borrowings, what do their balance sheets look like?

Earlier this year, BNM published its 2010 Financial Stability and Payment Systems report, highlighting that some 33% of households’ financial assets are in the form of equities and unit trusts, and are susceptible to the performance of the stock market.

Equity holdings and unit trust funds accounted for 17% and 16% respectively of household assets at the end of 2010, with endowment policies accounting for 6%.

Bank deposits form the biggest chunk of household financial assets at 31%, followed by retirement savings with the Employees Provident Fund (EPF) with 30%, and equities 17%.

In fact, equity holdings were at their highest levels since the financial crisis in 2008, recording a 20% change on an annual basis according to the report. This was partly due to the stock market recovery that saw the FBM KLCI gaining 19.34% in 2010. It also contributed to the bulk of the 14.9% expansion in household financial assets last year.

If the high volatility in equity markets persists, it may impinge on a household’s ability to service its debt and mortgages, and inadvertently slow economic growth.


Malaysian households are vulnerable to market volatility as about 33% of their financial assets are in the form of equities and unit trusts.

Equity markets around the world have been on a downhill slide since August, hit by the European debt crisis and a slew of other external concerns. Starting with Standard & Poor’s downgrade of US sovereign debt, worries spread to a possible default by Greece and several other European countries, as well as slowing growth in China and a sluggish recovery in the US.

In August itself, 7.9% or RM97.4 billion was wiped off the KLCI’s market capitalisation, with a further RM69.6 billion erased in September.

Year-to-date, the KLCI has declined 5.15% to 1,454.4 last Friday, and is off an intra-day high of 1,597.08. From the year’s high to the year’s low of 1,310.53 on Sept 26, the index fell 17.9%. The market has since rebounded from the low rising 10.9% to last week’s close.

BNM shared its concern over the stock market’s impact in the report.

“With one-third of household financial assets in the form of equity, households are susceptible to volatile swings in equity prices as observed in 2008, when a 39.3% fall in the KLCI precipitated a decline in household financial assets. This in turn, may subject the household financial position to the vagaries of the equity market.”

In 2008, the value of equity holdings and endowment policies held by households fell by over 35% when the stock market slumped. The value of unit trusts fell over 15% while bank and EPF deposits chalked up modest growth.

However, BNM also said this risk is mitigated by “a substantial and almost equal proportion of household financial assets represented by deposits with financial institutions, which continue to provide a comfortable buffer to support households’ debt servicing ability”.

The central bank added that at the end of 2010, the ratio of financial assets-to-debt remained relatively unchanged at 238.4%, with more than 60% of the financial assets held in the form of highly liquid assets.

Economists contacted by The Edge Financial Daily were not too worried about the impact of the stock market volatility on household assets.

“Investors would have already taken that into consideration when investing,” said Dr Yeah Kim Leng, group chief economist at RAM Holdings.

The current market decline would produce negative wealth effects, but this would be offset by rising income and the rally in commodities prices this year, he said.

“The question now is what is the threshold that would trigger bankruptcy and defaults,” he elaborated. Yeah said the current correction in the markets is not sizable enough to trigger such a situation.

There are other indicators to observe, including employment levels, wage rates and bank credit flows, he said.

“If credit lending for retail and households were impinged, then spending would definitely be cut,” he warned.

Those who invested in the stock market would be the ones with excess savings, he said, adding that households can still depend on fixed income sources such as unit trusts like Amanah Saham Bumiputera and savings deposits which can provide stable returns.

Yeah estimated that the KLCI would have to drop between 30% and 50% from its peak this year to cause any real effects to households.

“This time around, the market is more dominated by institutional investors than retail compared with the 1997 Asian financial crisis. So investors won’t be directly burned by this correction,” said Suhaimi Ilias, an economist at Maybank IB Research.

Suhaimi said: “Unlike back in the 1990s, leveraged equity investments via share margin financing (SMF) were a big thing so individuals were far more vulnerable to market swings due to margin calls and forced selling. As mentioned, this time around household assets related to equity investments are mainly placed under professional fund managers who are better equipped to monitor the investment portfolio and manage risks. Banks are also far more careful in extending SMF these days.

“For that matter, banks are also exercising a great deal of prudence in lending as part of credit risk management, under the close watchful eyes of Bank Negara, which has also been implementing macro prudential measures since late 2010 on mortgages and credit card loan.

“To me, 33% of households invested in equities and unit trusts is not that high a ratio. Moreover, the household financial assets to household debt ratio obviously excludes real assets [such as property holdings] but includes mortgages on the debt side ... so the household assets to debt cover could be higher,” he said.

Nontheless, Suhaimi said a weakening sentiment can affect the real economy as households and consumers turn more cautious in their spending as they react to market news and movements.

“The household assets to debt cover figure is an aggregate statistic, with no breakdown by household income groups, that is high income, middle income, low income,” he added.

“Chances are the lower income households and those working in export-based industries, for example, may be vulnerable due to a lower household assets to debt cover, and from the impact of the global downturn, as what we saw in 2008/09 when many people in the manufacturing sector were retrenched outright or had reduced income due to redundancies or working on shorter shifts,” he said.

“This can lead to difficulties in repaying loans and rising non-performing loans. Back in 2008/09, Bank Negara stepped in to provide temporary relief for the retrenched workers by allowing banks to grant a six-month moratorium on housing loan repayments,” he said.

With high debts and a rising propensity to invest in riskier assets, maintaining near full employment and raising income levels are keys to maintaining households’ financial sustainability.


This article appeared in The Edge Financial Daily, November 21, 2011.

Debt Levels Alone Don’t Tell the Whole Story

By FLOYD NORRIS

Published: September 23, 2011

AS the world’s central bankers and finance ministers gather in Washington this weekend for the annual meetings of the International Monetary Fund and World Bank, government debt is at the top of the agenda. Some governments can no longer borrow money and others can do so only at relatively high interest rates. Reducing budget deficits has become a prime goal for nearly all countries.

Multimedia

Graphic

Why Some European Government Debt Seemed Deceptively Small

But looking only at government debt totals can provide a misleading picture of a country’s fiscal situation, as can be seen from the accompanying tables showing both government and private sector debt as a percentage of gross domestic product for eight members of the euro zone. The eight include the largest countries and those that have run into severe problems.

In 2007, before the credit crisis hit, an analysis of government debt would have shown that Ireland was by far the most fiscally conservative of the countries. Its net government debt — a figure that deducts government financial assets like gold and foreign exchange reserves from the money owed by the government — stood at just 11 percent of G.D.P.

By contrast, Germany appeared to be in the middle of the pack and Italy was among the most indebted of the group.

Yet Ireland was slated to become one of the first casualties of the credit crisis, and is now among the most heavily indebted. Germany is doing just fine. Italian debt has risen only slowly. The I.M.F. forecasts that Ireland’s debt-to-G.D.P. ratio will be greater than that of Italy by 2013.

It turned out that what mattered most in Ireland was private sector debt. As the charts show, debts of households and nonfinancial corporations then amounted to 241 percent of G.D.P., the highest of any country in the group.

“In Ireland, as in Spain, the government paid down debt while private sector grew,” said Rebecca Wilder, an economist and money manager whose blog at the Roubini Global Economics Web site highlighted the figures this week. She was referring to trends in the early 2000s, before the crisis hit.

Much of the Irish debt had been run up in connection with a real estate boom that turned to bust, destroying the balance sheets of banks. The government rescued the banks, and wound up broke. Spain has done better, but it, too, has been badly hurt by the results of a real estate bust.

The story was completely different in the Netherlands, which in 2007 ranked just behind Ireland in apparent fiscal responsibility. It also had high private sector debt, but most of those debts have not gone bad.

The differences highlight the fact that debt numbers alone tell little. For a country, the ability of the economy to generate growth and profit, and thus tax revenue, is more important. For the private sector, it matters greatly what the debt was used to finance. If it created valuable assets that will bring in future income, it may be good. Even if the borrowed money went to support consumption, it may still be fine if the borrowers have ample income to repay the debt.

That is one reason many euro zone countries are struggling even with harsh programs to slash government spending. With unemployment high and growth low — or nonexistent — it is not easy to find the money to reduce debts. And debt-to-G.D.P. ratios will rise when economies shrink, even if the government is not borrowing more money.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

http://www.nytimes.com/2011/09/24/business/debt-numbers-alone-tell-little-about-fiscal-stability.html?_r=1&ref=business

Cash Flow Model of Households

Wednesday March 30, 2011

Don't over-borrow

Plain Speaking - By Yap Leng Kuen

ALTHOUGH only two restrictions have been placed on borrowing for the purchase of a third or more homes and credit card eligibility, it does not mean that there won't be more to come.

In fact, consumers should be vigilant as Bank Negara is believed to be putting more intensive supervision on certain aspects of the property and personal loans sectors.

For example, the 5:95 property loan scheme offered by certain companies falls under this category of supervision.

Under this arrangement that was implemented during the market doldrums, only 5% downpayment was required for the purchase of a property with the rest of the financing in the form of a bank loan.

There was talk that the 5:95 scheme was mainly extended to affluent housebuyers but the bulk of the repayments are coming onstream this year. Hence, the monitoring of these repayments as well as pockets of borrowing that are still available under this scheme.

Personal loans form 15% of the total loans portfolio but due to the higher borrowing rates, extra care and discipline are required to guard against over-borrowing.

The extension of credit by non-bank institutions is also being monitored amidst lessons gleaned from countries suffering from high indebtedness.

Credit schemes extended by cooperatives and cooperative banks are likely to be scrutinised for affordability on the part of the borrowers.

Covering all aspects of household loans, the upcoming guidelines on lending and affordability represent part of the internal controls that are put in place to monitor the situation.

Under this surveillance, over-lending to single borrowers is discouraged.

In fact, the entire credit scenario is being assessed via a holistic package of policies and measures that cover prudential, intensive supervision, standards on banking institutions and consumer education.

Household indebtedness, at 75.9% of Gross Domestic Product at the end of last year, may be on the increase but indications are that it has not become destabilising.

On the contrary, wealth accumulation remains healthy with liquid assets forming 64% of financial assets while delinquency levels remain low - the non-performing loans for credit cards is at 2%.

Nevertheless, it is not a time to be sanguine especially when high energy and commodity prices pose risks to the economy.

Senior business editor Yap Leng Kuen views this an opportune time to remind everyone that “prevention is better than cure.''

http://biz.thestar.com.my/news/story.asp?file=/2011/3/30/business/8375253&sec=business

Low interest rates lead to debt: RBA

Low interest rates lead to debt: RBA

June 15, 2010 - 1:34PM

Financial deregulation and structural declines in the cash rate have led to increased household indebtedness, the Reserve Bank of Australia (RBA) says.

But while evidence suggests increased levels of debt have not left Australian households over-exposed, pockets of stress remain, RBA deputy governor Ric Battellino said on Tuesday.

"All countries have experienced rises in household debt ratios over recent decades," Mr Battellino said in a speech in Sydney.

"Clearly, therefore, the forces that drove the rise in household debt ratios were not unique to Australia.

"The two biggest contributing factors were financial deregulation and the structural decline in interest rates."

Between 1985 and 1995, the average cash rate in Australia was 11.4 per cent, compared with the average 5.3 per cent between 2000 and 2010.

The current cash rate is 4.5 per cent following six rate hikes since October last year that took the rate off a 49-year low of three per cent.

However, Mr Battellino said first home buyers will bear close watching in the future while pockets of stress have emerged in Western Sydney following a sharp run up in house prices between 2002 and 2003.

"More recently there are some signs of increased housing stress in south-east Queensland and Western Australia, again following sharp rises in house prices in these areas," he said.

Mr Battellino said despite increased levels of debt, evidence suggests Australian households are servicing it well.

Most household debt is being raised to buy assets, while debt is being taken on by households in the strongest position to service it.

He noted financial assets held by households have grown to the equivalent of 2.75 years of household income, up from 1.75 years income in the early 1990s.

"If we look at the distribution of debt by income, we can see that the big increase in household debt over the past decade have been at the high end of the income distribution.

"Households in the top two income quintiles account for 75 per cent of all outstanding household debt.

"In contrast, households in the bottom two income quintiles account for only 10 per cent of household debt."

Mr Battellino was speaking to the Financial Executives International of Australia at the law firm Clayton Utz.

The event was closed to the media and an embargoed copy of the speech was provided.

This story was found at: http://news.smh.com.au/breaking-news-business/low-interest-rates-lead-to-debt-rba-20100615-ybxl.html