Tackling the problem of high household debt

There has been some trepidation over just what Bank Negara has up its sleeve in trying to tackle rising household indebtedness in the country.

Indications given previously were that new guidelines to address the issue of affordable borrowing and responsible lending would be out this quarter.

The reason for this has been the rise in consumer or household debt and the latest statistics show that much of that continues to be in the area of housing loans.

Mortgages continue to rise and the latest numbers indicate borrowing by people to buy a house has not slowed down at all despite regulation introduced late last year to limit the amount of money banks can lend to people buying a third home onwards.

Over the past couple of months, a white paper has been sent to banks to study how mortgages could be given based on just how much people could afford after making the deductions for their necessary household expenses and taxes instead of the gross salary they pull in each month.

Obviously, property players are resisting the introduction of such a measure. The impact is that people will be perceived as having less money to pay for their new mortgages should the rules of the game surrounding property loans change.

People still have a choice should those new rules come into force. Homes prices were up 12.2% last year in Kuala Lumpur and 11.4% in the first quarter in the capital, but reasonably priced homes could still be found in the secondary market. Just don’t expect to find one in the hot segments of the market though.

The hard fact, however, is that introducing a debt service ratio calculation in assessing loan amount eligibility is the right thing to do for the long-term sustainability of the household segment.

As of 2010, the debt service ratio for every ringgit earned by households is 47.8 sen. That would include debt taken by the household sector which includes property loans and car loans.

People have other obligations such as taxes, deductions for employees provident fund and daily living expense cost, which are increasing as inflation works its way through the economy.

As more Malaysians watch satellite TV, have mobile phones and subscribe to broadband, those expenses would appear to be the new norm rather than a luxury for most middle incomes and even households just below that bracket.

Should loans be given based on gross loans, and do not take into account the more realistic cost based on affordability, then the current boom in household credit and the property market will become a problem at a later stage.

Household debt is 76% and looks like it will rise and will emerge as a major problem should the economy turn for the worse, unemployment jumps up, interest rates rise, or should living costs keep on escalating.

Preparing for all eventualities should be the prerogative of not only households but policy-makers too, and being cautious when the numbers suggest the limits of just how much more debt the household sector can absorb should be something that should be tackled when times are still good.

SOURCE: The Star