Household Debt and Macroeconomic Variables in Malaysia

Abstract

The rise of household debt in Malaysia has caused consternation since it has almost reached 89.1% of total GDP. The level of household debt is deemed to be at worrying stage as it may trigger another financial crisis. The purpose of this study is to examine factors that influence household debt in Malaysia via time series data. This study employs the ordinary least square (OLS) method and the macroeconomic variables used consist of base lending rate, housing price index, gross domestic product and unemployment as independent variables taken in the period from quarter one 2008 to quarter four 2015. The results show that the housing price index is the most significant variable, followed by base lending rate, unemployment and gross domestic product. House pricing index and gross domestic product show positive relationships with household debt, which indicates that the rise of household debt is determined by the rise of these explanatory variables. However, base lending rate and unemployment are found to have negative effects on the rise of household debt. The data are taken from Bank Negara Malaysia report, National Property Information Centre (NAPIC) and Asia Regional Integration Centre.

Keywords: Household DebtMacroeconomic VariablesMalaysia

1. Introduction

The rise of household debt in Malaysia has inflicted worry among households since it has almost reached 89.1% of total GDP in 2015. Household debt is the amount of money lent to borrowers for purchase of properties, personal use, securities, motor vehicles and credit cards (Malaysia Central Bank, 2013). The expansion of loans has led to the rise of household debt and it has been an increasing trend since the early 2000s. Malaysia is recorded as one of the highest in the Asian region with a household debt level of 89.1% in 2015. 56.2% of the loans were allocated for housing loans, making it the highest factor contributing towards the rise of household debt, followed by 15.5% for vehicle loans. This problem triggers another problem which is bankruptcy. According to Malaysia’s Department of Insolvency (2016), 5,547 individuals under the age 35 were declared bankrupt in 2015, more than double in number in 2005. Most young borrowers are burdened with study loans after graduation. Once they start working, their need for transportation arises, thus giving rise to loans for vehicles.

Therefore, the purpose of this study is to examine the macroeconomic variables that affect the household debt in Malaysia. The objective is to examine the impact of base lending rate, house price index, gross domestic product, and unemployment on household debt. The result shows that house price index and gross domestic product have positive relationships with household debt. While, unemployment and base lending rate are found to have negative effects on household debt. This study using 32 observations which covers for eight years from the year 2008 to 2015 on quarterly basis.

2. Literature review

3. Research design

In this section, the discussion will focus on the estimation model used for the selected macroeconomic variables and household debt. The dependent variable is represented by household debt in Malaysia. The independent variables consist of base lending rate, house price index, gross domestic product and unemployment. A multiple regression analysis is employed to estimate the ordinary least square (OLS) analysis in the period from quarter one 2008 to quarter four 2015. This study using 32 observations which covers for eight years from the year 2008 to 2015 on quarterly basis data. The OLS method is a procedure to determine the best fit line to data (Miller, 2006).

4. Analysis and Findings

From the correlation table (Table 1 ), it shows that the household debt has a positive relationship with all the independent variables except for unemployment. The result also revealed that none of the variables show serious multicollinearity problems in this study. Generally, correlation among independent variables is not a serious problem as the result shown is less than 0.8. The house price index shows a high correlation with household debt as the correlation is more than 0.8. Both base lending rate and unemployment were found to have a moderate correlation with household debt at 0.51 and 0.66 respectively.

The house price index, base lending rate and unemployment can influence household debt. Meanwhile, gross domestic product may not have a large influence on household debt as it shows a weak correlation with household debt.

Based on the results (Table 2 ), all variables have shown significant relationships with household debt. House price index and gross domestic product have positive and significant relationships with household debt, while base lending rate and unemployment have negative relationships with household debt. Base lending rate, house price index and unemployment are found to be significant at 1% respectively. The gross domestic product is significant at the 5% level. The F-test result shows significance at the 1% level, which means at least one of the independent variable has an influence on household debt. Besides that, the coefficient of determination (R²) shows that 90.26 % of the total variation in the dependent variable (household debt) can be explained by all the independent variables which are base lending rate, house price index, gross domestic product and unemployment.

As the base lending rate increases by 1%, household debt will decrease by RM 9460.577. This shows that there is a negative relationship between base lending rate and household debt in Malaysia. According to Hoang, Meng & Siriwardana (2011), the valid reason for this is that a rise of interest rates will also increase the cost of borrowing. Thus, households will postpone their intent to borrow or at least reduce the amount of money they intend to borrow. This will reduce the liability that they need to pay monthly to the financial institution. Other than that, the hiking of interest rate will affect households who have already incurred debt. Their liability to pay will rise and their repayment burden will increase if the debt is based on interest rates. The rise of interest rates will also discourage investments. The whole economy will slow down due to the reduction of investment. It may reduce households’ income, increase unemployment and reduce household borrowing. The household debt level will decrease if potential borrowers incur less debt than the amount of their scheduled repayments. This finding is in line with Endut & Hua (2009), who showed that a low interest rate environment reduces the cost of borrowing and increases the incentive for households to borrow in order to smooth their desired path of consumption over their life cycle. The increasing of credit cards usage due to the innovation of product by financial institutions to attract more consumers to make loans. Factors such as low interest rates, low inflation rate, and financial deregulations led to the rise in household debt.

As the house price index increases by 1%, household debt will increase by RM 323.9403. An increase in house price means an increase in housing assets. For new home buyers, they have to take more debt in purchasing a house. For those who have already taken housing loans, it is a good opportunity to withdraw housing equity. As a result, household debt will increase along with housing prices. This is in line with the findings of Rahman and Masih (2014) who studied the relationship between household debt and house prices. The result revealed that the relationship is statistically significant. It implies that house prices are the leading factor and an increase in house prices in the long run will increase household debt. The result was supported by Nizar (2015) who investigated the determinants of Malaysian household debt from a macroeconomic perspective. The researcher found that housing prices is significant, thus an increase in housing price will further increase debt.

Gross domestic product has a positive significant relationship with household debt. With an increase of gross domestic product by 1%, household debt will increase by RM 609.4033. An increase in gross domestic product means an expansion in economic growth. It also indicates a rise in household income. It widens the opportunity for households to borrow money as they can gain banks’ confidence to lend money. Steady economic growth makes people more confident to borrow to and lend money from financial institutions. Household debt may grow if the demand to borrow and willingness to supply money increases in line with the rise in gross domestic product. Rahman & Masih (2014) found that any changes in GDP may not affect household debts. Although the result found that GDP is endogenous, the authors believe that GDP as a proxy of income may play a vital role in the development of household debt in Malaysia. However, the researchers still believe that lending rates act as official instruments that control the amount of credit extended to the private sector. Thus, care should be taken to avoid large economic shocks since shocks on the lending rate may influence household debt income and directly impact the repayment of debts in the household sector.

Unemployment has a negative and significant relationship with household debt. The findings revealed that with an increase of unemployment by 1%, household debt will decrease by RM 12671.56. A high unemployment rate indicates that households will lose their source of income. Households will need money for consumption or savings, thus the desire to take loans will also rise to finance their expenses. However, potential borrowers will be discouraged from borrowing money as they worry about their ability to repay the liability to the financial institutions or lender. This reason will restraint households from borrowing money, thus the demand for loans will decline. Other than that, an increase in unemployment indicates unsteady economic conditions. Investors will be hesitant to invest in our economy and be cautious to lend. From this point of view, household debt will shrink. This finding is in line with Hamid, Sarmidi and Nor (2015) who found that unemployment has a negative and significant relationship with household debt. Unemployment will create uncertainty in the workforce market and prevent households from borrowing money. Financial institutions will also avoid issuing debt to prevent the risk of non-performing loans by households.

All of the variables were found to be important in explaining household debt in Malaysia. House price index and gross domestic product have positive and significant relationships with household debt, while base lending rate and unemployment were found to have negative and significant relationships with household debt.

5. Conclusions and Recommendations

The objective of this study is to examine macroeconomic variables that influence household debt in Malaysia via time series data by utilizing Malaysian macroeconomic variables’ data and household debt data from quarter one 2008 until quarter four 2015. The macroeconomic variables used are base lending rate, housing price index, gross domestic product and unemployment. The finding revealed that all of the explanatory variables have significant impact on household debt in Malaysia. House pricing index has a positive relationship with household debt. It shows that house prices is the leading factor that contributes to the increase of household debt in the long run. Base lending rate is negatively related to household debt. It implies that a low interest rate environment reduces the cost of borrowing, thus indirectly increases the incentive for households to borrow. Unemployment also has a negative relationship with household debt, Implying that defaults on payments will occur as borrowers will find it difficult to maintain their mortgage payments during periods of unemployment.

An abundance of credit supply caused by low interest rates leads to this problem. The amount of loans extended to the household sector is controlled by lending rates. Thus, the government should monitor the trend of lending rates to avoid large economic shocks since it may influence household debt incomes and directly impact the repayment of debts from the household sector. The government should also frequently supervise the housing market since most households take loan to purchase houses. Other than that, the government should also be strict when issuing new homes to households. Creditors should examine closely the credit conditions of households and only those with good credit conditions should be deemed competent to take housing loans. A higher gross domestic product indicates higher economic growth and implies that households gain higher income. Higher income gives opportunity to households to borrow money and confidence to the creditors to issue debt. However, the benefits of economic growth are not well distributed among households due to the existence of income inequality. Thus, the government should try to reduce this problem so that all households could enjoy the benefits of economic growth. Household debt can be reduced if the government creates more jobs in the economy, thus bringing more income into the household sector and consequently reducing debt among households.

Other variables should be taken into consideration for future research, for example consumer price index, savings and real income as these variables can explain more comprehensive relationship between household debt and the macroeconomic variables. Future researchers also are advised to use a longer time period (number of observations) for the study. The time frame may influence the result of the study since the longer the period taken to carry out a study, the more accurate the results that will be revealed.

Acknowledgement

The researchers would like to thank the Faculty of Business and Management, Universiti Teknologi MARA (UiTM) for providing this study a grant. The findings, interpretation and conclusion expressed here are those of the authors and do not necessarily reflect the view of UiTM.

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