Malaysians struggle as household debt soars

s not just household debt as a percentage of GDP that we should be concerned about, but household debt compared to disposable income is even more crucial. Take a look at the yellow bar to see where we stand.

Figure 3: Comparison of household debt/GDP and household debt/disposable income. Source: Yong, 2010; Endut and Toh, 2009; Bank Negara, 2010. - Graph: Penang Monthly

While our household debt as a percentage of GDP of 78 per cent may not be exceptionally high, our household debt to disposable income of 140 per cent is worrying.
Household debt to disposable income for selected countries:

• UK – 176% (2007)
• Malaysia – 140%
• US – 130% (2008)
• Japan – 120%
• Singapore – 105%
• Korea – 101%
• Germany – 95%
• France – 93%
• Italy – 70%
• Thailand – 53%
• Indonesia – 38%

Source: Penang Monthly; OECD Factbook 2010/Finfacts Ireland; CAP/Malaysian Insider
Now you know why many Malaysians don’t feel so well off, with this level of household debt. About half our disposal income goes to servicing debt.
What are some of the factors driving the high household debt/disposal income ratio?

• High growth in consumer-driven spending
• Low interest rates encourages borrowing
• East credit by banking institutions due to financial liberalisation (translating into fat profits for the banks?!)
• Rising house prices especially in KL and Penang where the average house price to average income ratios are much higher
• and of course, low income/wages

Below is another graph showing the rising household debt to GDP ratio over the last few years. Household debt now stands at 78 per cent of GDP.

Household debt/GDP. Source: Endut and Toh (2009); Bank Negara (2010; Chua (2010). Graph: Penang Monthly