What if the household debt to GDP hits 100%?

THE debt of the average Malaysian household as a percentage of the gross domestic product (GDP) stands at 86.8%.

Except for a brief respite in 2008, the number has been on the uptrend since 2002. The rise is especially evident since 2009.

That year, the ratio of household debt to the GDP was 72.4%. The subsequent years, the ratio gradually picked up, and hit 81.3% in 2012. Last year it grew by 5.5%, the strongest seen in recent years.

Indications are that the household debt to GDP ratio can hit 100% of GDP. This is something that economists are predicting and something that they contend have not been ruled out by Bank Negara officials.

So what is the household debt to GDP hits and exceeds 100% of the GDP? This will only mean that the average Malaysian household is carrying debts as much as its income.

Would Malaysia be the first country to have such a ratio? Certainly not because there some examples of countries that have far exceeded the 100% mark.

According to some reports, Ireland has the highest household debt to GDP ratio at 106% as at end of the first quarter last year.

The US had a household debt to GDP ratio as high as 130% in late 2007. The following year the financial crisis hit the country caused by the burst in the housing bubble. As at the first quarter last year, the ratio, according to a report, is down to 78%.

In the region, Indonesia has one of the lowest household debt to GDP ratio at 17%. Thailand and Singapore both have their ratios at less than 70% while the figure in South Korea is 86% as of the first quarter of last year.

Japan surprisingly has a ratio of 66% in the first quarter of 2013 and it has declined by 2% compared to six years earlier. Chinas household debt ratio to the GDP is less than 25% as at early last year.

What does all the facts coming out of the various countries tell us?

Most countries do not see household debt to GDP ratio exceed 100%. Countries that have slow growth in population or with a large proportion of ageing population such as Japan see lower ratios.

This is probably because there is less demand to own a house or car.

In the region, Malaysias ratio is the highest. The reason for the rise in household debts is due to the spiralling prices of property.

According to Bank Negara statistics, the bulk of the household debt comprises housing loans followed by financing for motor vehicles. Personal loans, credit card outstanding debts and other form a small portion of household liabilities.

But the rise in household debts is not only due to the spiralling house prices. For Malaysia, it is also due to the young population and rapid urbanisation that has prompted the chase to own a property.

So far the government, in a bid to stem the rise in property prices, has taken measures to deter speculators.

For instance, loans to the third property is restricted to 70% of value while foreigners are only allowed to purchase properties that are RM1mil and above. There are also suggestions to restrict any one entity or individual purchasing more than four properties in a single project.

This is to prevent property clubs which is a loose alliance of high net worth individuals pooling their financial resources to buy properties in bulk and at a discount from disrupting the market.

There is also the imposition of the real property gains tax, making it painful for people to sell a property within the first three years of purchase.

But all these measures will not stop households from accumulating more debt. As long as Malaysia has a young population wanting to own a property and car, the debt will continue to spiral.

At the moment, there is nothing to stop households from de-leveraging. The prolonged period of low interest rates is set to continue, house prices are still rising, albeit at a slower pace and speculators are still holding on to their third or fourth property with the hope of disposing it at a higher price.

Some are hoping to get a rich but foolish tenant who would be willing to fork out a large rental.

In the United States, the household debt to GDP ratio fell like a thud after the financial crisis where banks, got caught by their own fancy structured products with housing loans as collateral.

When a class of housing loans started to default, the cascading effect finally resulted in the collapse of the financial system.

In Malaysia, Bank Negara has stated that it is still keeping its options to use monetary policies to ensure the system is not in danger. If and when it is used, who will pay the price?