Household Debt: A Different Perspective

From today’s The Star (excerpt):

Malaysia's household debt on the rise...But mortgage NPLs at an all-time low

PETALING JAYA: Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009, and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, said CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

The rapid growth of household borrowings is causing some worries that the excessive leveraging by households may make the economy and financial sector more vulnerable to instability and crisis...

...As at December 2010, mortgage NPLs stood at 3.3%. Its highest level was at 8.6% or about RM14bil in 2006. Since March 2007, this figure has been trending down...

...Certainly, rising property prices have fanned an increase in borrowings. The share of household loans to total bank loans rose from 35.2% in 2000 to 55.5% as at end-August 2010. Mortgage debt accounts for 48.5% of total household loans currently.

Another banking analyst said that while the household debt level was high, Malaysians also had a very high savings rate, at about 35% of GDP...

...CIMB head of economics Lee Heng Guie said the various financial indicators indicated that Malaysia's household balance sheet remained healthy with financial assets' coverage of total debt at 2.5 times, the liquid financial assets to debt ratio remained strong at 148.6%, and the non-performing loans ratio was low at 3.1% vs 8.5% in 2004.

“The strong balance sheet enabled the household sector to continue servicing its debt despite the rise of the debt service ratio to 49.2% in 2009 (38.4% in 2004),” said Lee.

As at end-August 2010, mortgage loans accounted for 48.5% of total household loans and 26.9% of total bank loans, followed by motor vehicle financing (25.9% of total household loans).

Credit card lending accelerated 16.4% per annum in 2000 to August 2010, pushing its share of total household loans from 5% in 2000 to 6.1% currently...

...He added that on the demand side, the rapid build-up of household debt stemmed from changing demographics, strong economic growth, a steady rise in incomes and low interest rates.

To be fair, I think this article is more an initiative of the paper than any comprehensive analysis by local economists.

But here’s the problem I see: if you take the numbers at face value, you’ll think there was a problem with household debt. And there’s no doubt that there has been a significant rise since the turn of the century.

But if you’re looking back just five years, a pretty different picture emerges.

Take for instance that first line, the numbers from CIMB Research. 8.4% growth in just eight months sounds pretty hefty, until you check the numbers for non-household debt – the growth rate is almost identical.

Here’s the ratio of household borrowing from the banking sector to total loans:

Do you see the difference? Neither do I. As a share of total loans, lending to the household sector has been almost flat in the last five years. If you do a breakdown by loan purpose, the shares there are flat too – mortgages, auto, and credit cards. The only household loan category that’s climbing is “personal use”, which took in an extra 1% share since 2005 to about 4.8% – but that’s flattened in the last year as well.

Here are the ratios of lending to nominal GDP (left axis: household borrowing; right axis: total borrowing):

Not much of a difference here either – I could probably be do this more formally with a statistical test, but I’m not going to bother.

Now, if household borrowing were actually increasing more rapidly than total borrowing, then I agree we could be seeing a problem with increasing household debt. But that’s not really the case here.

What we really ought to be talking about is the increase in debt loads generally, but that distinction seems to be missing from this debate. If there is a concern with household debt, it should be with its distribution i.e. how much is being taken on by lower income households. The aggregate balance sheet numbers are comforting, but those could hide a lot of heterogeneity within the household sector itself. But these are numbers we simply do not have. For instance there’s no doubt that national savings are high – but that does not imply household savings are high. Most of the savings accrued over the past decade has been corporate savings, not household, which implies households that have managed to increase their savings have been those whose incomes come mainly from ownership of capital i.e. higher income households.

But getting back to the real issue, it’s higher credit expansion for both household and non-household sectors that should be the concern, not just household borrowing. And while we’re at it, total financing generally and not just bank loans – an increasingly bigger portion of bank finance is actually being funnelled through the capital markets:

Just to make my point perfectly clear, here’s the ratio of bank lending to households against total financing (bank loans + bank holdings of PDS + bank holdings of MGS), with two different sample sizes:

If all you saw was the growth number from the beginning of the first sample to now, you’d think there was a problem. And if you all you saw was the growth number from the second sample, you’d think everything was hunky dory. The answer is probably somewhere in between.