Friday, 2 August 2013

Housing, car loans cause of rising debt

The article was first published on Free Malaysia Today.

Housing, car loans cause of rising debt’

G Vinod
 | August 2, 2013
Several academics say that high asset prices and low wages are pushing Malaysians into debt.
PETALING JAYA: Malaysia’s household debt ratio to the nation’s Gross Domestic Product (GDP) stands at 83%, which is one of the highest in Asia, beating even Japan and Hong Kong.
The government said recently much of the nation’s household debt comprises housing, car and personal loans.
Some economists have said the nation’s high household debt ratio was caused by Malaysians who live beyond their means.
Others disagree with the argument and said the nation’s high household debt ratio was caused by a combination of factors.
“It is a combination of high asset prices and relatively low-income earners,” said Taylor’s University business school economist Subramaniam Pillay.
He said young graduates who were in their first jobs did not earn salaries which could enable them to buy cars and houses.
“Let’s take house prices as an example. In the last 40 years, the gap between salaries and property prices has widened. House prices have soared compared with the rise in salaries.
“So, many of them have no choice but to live by borrowing,” said Subramaniam.
Echoing Subramaniam’s sentiments, Universiti Sains Malaysia (USM) economist Amir Baharuddin also dismissed arguments saying that the nation’s working adults are spending beyond their means.
“It’s not that they have little money-management skills. The problem is, there is no money to manage,” said Amir.
Citing examples, the USM academic said working adults had no choice but to buy a house, despite its exorbitant price, due to necessity.
“Later they buy car to travel to work because the public transportation system is inefficient. As you know, cars are not cheap. So is there any money left to manage?” he asked.
Excessive government intervention
Institute of Democracy and Economic Affairs (Ideas) chief executive officer Wan Saiful Wan Jan said the high household debt ratio was caused by excessive government intervention in the economy, causing artificial inflation.
“For example car prices are inflated because of high excise and import duties,” he said.
High house prices is also a factor, but Saiful said it was caused by too much demand.
“I think this is a problem of too much development in the Klang Valley alone. If you spread development to other areas such as Seremban, Ipoh and Kota Baru, you will see a drop in house prices,” he said.
On how we can resolve the high household debt problem, Amir said it was time for the government to get serious about lowering house and car prices.
“Keep tabs on credit card surcharges as well. Currently, many credit card companies impose hidden charges that is becoming a burden to working adults,” he said.
However, Amir said it would not be easy to resolve the matter immediately.
“It is an enormous problem. Even economists may not have a definite solution for this. Maybe it is because we are depending too much on the western financial system,” he said.
Subramaniam, on the other hand, said not all debts were negative in nature, especially when it involved mortgages.
“It’s not a bad situation if you borrow money to buy a house as you are paying for a property,” said Subramaniam.
He added that it was also difficult to give a precise solution to the matter as not much details were provided on the household debt ratio.
“For example, do we know who are the people in debt? Is it the poor or the affluent ones? These are the details we need.” said Subramaniam.
Last month Bank Negara announced that it will cap the housing loan term to 35 years and halted all pre-approved personal financing products in order to address the high household debt issue.
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