Thursday 01 Jun 2023
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This article first appeared in The Edge Malaysia Weekly on June 21, 2021 - June 27, 2021

CONSUMER borrowing and bank lending at increased levels amid the Covid-19 pandemic is raising concerns that low interest rates are fuelling another round of debt-propelled economic expansion.

At the same time, government initiatives such as the Home Ownership Campaign (HOC) — while beneficial to house buyers and developers — add to banking sector loans, which may not be sustainable, especially if the economy remains weak and uncertain, analysts say.

Banking data shows that loan applications and approvals by local banks have been at elevated levels since the end of the first round of the Movement Control Order (MCO) in May last year. For instance, loan applications hit a record high of RM94.24 billion in March.

The current trend has reignited memories of the 2008/09 global financial crisis (GFC) and ultra-cheap loans, which lured borrowers into a cycle of debt-fuelled growth that drove economic expansion but increased household debt significantly.

Household debt jumped from 72.4% of gross domestic product (GDP) at end-2009 to a worrying 86.94% at end-2015, prompting Bank Negara Malaysia to impose a series of measures aimed at curbing the rise.

While the debt level then was worrying, it has shot up to an even more alarming level now. At end-2020, the household debt-to-GDP ratio stood at 93.3%, as the economy had contracted by 5.6% last year.

However, the smaller economy is not the only reason for the high ratio. Historically low interest rates are also fuelling debt accumulation by households, which have funnelled loans mainly to the purchase of residential properties and passenger cars.

Of the RM94.24 billion in loan applications in March, RM36.14 billion, or 38.35%, was for the purpose of purchasing residential properties, followed by RM10.77 billion, or 11.43%, for the purchase of passenger cars.

A month later, in April, loan applications dipped slightly to RM93.62 billion, with residential property acquisitions accounting for RM36.74 billion and passenger vehicles, RM10.46 billion.

Is debt-fuelled consumption, coupled with high household debt, healthy for the banking system or the economy?

“If you let this situation continue, and if there are no pre-emptive macroeconomic measures by the government, then it could be a problem,” cautions Lee Heng Guie, executive director at The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC).

“The flip side of keeping rates low for too long is the risk that you keep fuelling the asset bubble. When loans are cheap, it will encourage people to take more risks and engage in speculative investments.”

With household debt at a multi-year high, the sustainability of these debts and the ability of debtors to service their loans is the million-dollar question.

Should the economy worsen, can banks shoulder an uptick in non-performing loans?

Bank Negara appears confident about the robustness of the banking system, since it has mandated rigorous capital adequacy requirements and buffers over the past decade post-GFC.

In the central bank’s Financial Stability Review for the second half of 2020, it found that the debt-servicing capacity of most households had been sustained during the period, supported by existing financial buffers and relief measures.

Households’ financial assets-to-debt and liquidity-to-debt ratios had remained broadly intact, at 2.2 times and 1.5 times respectively. Most households resumed loan repayments after the automatic moratorium ended.

Bank Negara’s review also found that the financial system can withstand a more severe economic condition, including negative GDP growth in 2021 and below pre-pandemic levels in 2022, increase in the unemployment rate, and lower growth of house prices in 2021 and 2022.

According to Bank Negara’s findings, under the hypothetical adverse situation, the banks would still be able to maintain a total capital ratio of 16.8% — above the required 8% — while the insurance sector’s capital adequacy ratio would hover around 173%, against the required 130%.

At end-2020, the banking system’s total capital ratio stood at 18.5% while the capital adequacy ratio of the insurance sector stood at 218%.

While the banking system may be able to withstand an economic shock, can households do the same?

Independent economist Dr Nungsari Radhi has his doubts. He observes that although the Financial Stability Review findings suggest that the elevated level of household debt poses no systematic risk to the banking system, given the still-comfortable financial assets-to-debt ratio, the distribution of ownership of those assets is skewed towards high-income households.

“The lower two-thirds of households are up to their eyeballs in debt! That is why the loan moratorium is essential now for these households, especially the ones that are affected by the pandemic and small/micro businesses whose cash flows have been affected,” he stresses.

“Household debt has been high for a while now and Bank Negara has been highlighting this. These are for housing and consumption (including motor, credit card and personal loans). Government policy has reduced transaction costs for auto and houses, which explains the robustness [of demand].

“It worsens the indebtedness of households but makes businesses happy, and the government is pro-business,” says Nungsari.

Given the property sector’s significant contribution to economic growth since the GFC, Putrajaya largely obliges developers whenever possible. Take, for example, the HOC, which has reduced the transaction cost of buying a house, as stamp duty is exempted for the purchase of residential properties priced below RM1 million.

National Property Information Centre (Napic) data shows that the number of property transactions increased to 328,647 units in 2019 from 313,710 units in 2018 — a growth of 4.8%, although the figures include non-residential properties.

The uptick coincided with the launch of the HOC in 2019 and was the first meaningful growth for the sector since 2011, when the number of residential property transactions jumped by 14.3% year on year. Since 2011, the numbers had either dwindled or stagnated prior to 2019.

Nevertheless, 2019 growth could not be sustained, as the Covid-19 pandemic and ensuing movement restrictions dampened the property market considerably in 2020, the HOC notwithstanding.

Last year, 295,968 properties were transacted, or a fall of 9.9% y-o-y, while the value transacted plunged 15.8% to RM119.08 billion compared with RM141.4 billion in 2019. The value transacted in 2020 was the lowest since 2010 and a far cry from the 2014 peak of RM162.97 billion.

In the first quarter of this year, property transaction volume grew y-o-y but fell quarter on quarter. A total of 80,694 transactions was recorded by Napic in 1Q2021, compared with 91,260 in the previous quarter and 72,867 in 1Q2020.

But, as housing loan applications for 1Q2021 were higher at RM82.57 billion, against RM81.7 billion in 4Q2020, average house prices could have increased in the first three months of the year.

Although an increase in property values is generally good for the economy — especially as houses tend to be appreciating assets — debt-fuelled growth, rather than an increase in income and wealth accumulation, is unsustainable.

“If you look further and dissect the banking data numbers, outstanding loans in the banking system, owing to residential property, is also quite high,” says Lee of SERC.

The percentage share of housing loans as at end-April was 33.8%, or RM626.9 billion, of total outstanding loans in the banking system.

This is a big leap from end-December 2010, when it was at RM227.8 billion, or 25.8%, after Bank Negara tightened lending for home loans.

“So, you can see that, in terms of absolute numbers, it has been going up. Even before Covid-19, interest rates had been kept quite accommodative so that it spurred accumulation of assets through debt,” Lee observes.

The growth in loan applications since June last year also tallies with the growth in loan approvals over the same period. After the first MCO was lifted in June last year, the value of approved loans jumped to RM30.24 billion that month from RM18.19 billion in May.

Loans approved stayed above the RM30 billion threshold until December 2020, before dipping below the mark in January and February this year. The value rocketed in March to RM36.9 billion and was sustained at RM35.7 billion in April.

The HOC could be a reason for the rise in loan applications and approvals in March and April, as the campaign was to end at end-May. However, it was subsequently extended to the end of the year.

In fact, the RM12.57 billion in loans approved for residential property purchases in April was the highest ever, beating the previous high of RM12.53 billion in July 2013.

Nevertheless, banks continue to be vigilant, as can be seen in 1Q2021, when loans approved for residential property purchases amounted to RM28.05 billion compared with RM30.5 billion in 4Q2020. This means that, in 1Q2021, only 33.4% of loans applied for this purpose were approved, compared with 37.3% in 4Q2020.

This can be seen in the performance of property sales in 1Q2021. According to CLSA’s June 2 report, developers registered sales growth of 120% y-o-y on average in 1Q2021, with the favourable momentum flowing to April and May. The sector is on track to achieving its FY2021 sales target, which is 20% higher on average than in 2020.

While the May implementation of a Full MCO (FMCO) could prove to be a setback for property developers to maintain the high sales volume of 1Q2021 in 2Q2021, CLSA’s Andrew Lim suggests that sales in the second half of the year could pick up the slack.

“During the FMCO, sales galleries are expected to remain closed while contractors are still in the midst of applying for permits to operate [during the period]. However, we expect 2H2021 to offset the minor setback in 2Q2021 sales as companies push back their 2Q2021 launches to 2H2021.

“Meanwhile, companies such as Sime Darby Property and S P Setia have yet to carry out the bulk (more than 85%) of their launches for the year, providing a sizeable support for sales for the rest of the year,” Lim says in the report.

He adds that companies such as Sunway Bhd, Eco World Development Group Bhd and S P Setia Bhd are expected to revise their sales targets upwards this year.

As the government continues to ramp up the Covid-19 vaccination programme, property prices are expected to rally in the fourth quarter of the year, UOBKayHian analyst Chloe Tan Jie Ying says in a June 9 report.

“This would also be supported by a protracted low-rate environment and the extension of the HOC until end-2021. Yet, we believe the growth momentum could be short-lived, as structural challenges (supply glut, rising household leverage, political instability and so on) could continue to weigh on demand over time.”  


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