Curbing Household Debt

BNM will apparently be making an announcement next week on limits to housing loans:

Bank Negara likely to announce property curbs next week

KUALA LUMPUR: Bank Negara is expected to announce next week measures to curb property speculation and a programme to create financial awareness for the youth, said sources.

The introduction of a loan to value requirement for people buying their third house or more has been talked about, but central bank governor Tan Sri Dr Zeti Akhtar Aziz said any new rules regarding property loans would not be a blanket clamp. ..

…“So, for first time house owners and perhaps even the second one, any new rules will not apply.’’

Zeti acknowledged there were pockets of property bubbles in the country, but on the whole, steep property rises were not seen throughout the country.

“If we consider there is any imminent risk of a property bubble, of course we will take pre-emptive action. We are not going to wait for the bubble to happen before taking action,’’ she said.

…On Wednesday, Deputy Finance Minister Datuk Donald Lim Siang Chai told parliament Bank Negara was studying possible policy changes for those taking up loans to buy a third house or more...

...“The loan-to-value ratio will be specific in nature and its implications on the country’s economic growth will be taken into account,” he added.

Zeti said the banking system through its own risk management and governance process was addressing rising property prices and Bank Negara had other pre-emptive areas it might take up.

One example she gave was on financial literacy and management especially for the younger population below the age of 30.

“We want them to be better positioned to manage their finances when they acquire a car and a house in the beginning of the career,’’ she said, adding that the central bank would introduce programmes for those purposes and was ready to deal with any excesses through a wide range of instruments.

This has been going on for a couple of months now, so it’s not a complete surprise. Administrative rules for things like this were always a more likely policy action in lieu of raising interest rates, given that most of the action has been taking place in certain hotspots, rather than price increases across the country.

Looking at household borrowing certainly reinforces the notion that some curbs should be placed (log annual and monthly changes; ratio of household loans to total loans):

What makes limits on housing appropriate is that growth in household borrowing is entirely concentrated in mortgages – neither auto (declining) nor credit cards (flat) have increased their share of total loans.

As far as the effectiveness of raising loan-to-value limits is concerned, I really don’t know how effective this will be. We will have to wait and see. I certainly can’t think of any other options on the banking side to slow housing speculation, especially since the government left real property gains tax untouched in the budget.