Wednesday, October 16, 2013

Reality check on debt mountain---- by alan tong kok mau

Reality check on debt mountain
A YOUNGSTER came to me recently to seek views about his financial stress. He says the first thing he does when he gets his pay cheque is to repay loans, including a car loan, credit card payments and personal loan. Owning a house is on his wish list, but it is yet to be realised.

His case mirrors many similar situations faced by Malaysians nowadays, not only confined to the younger generation. It has become a concern to the authorities as our household debt ratio against the GDP (gross domestic product) has reached an all-time high of 83% as of March this year, the highest for a developing country in the region. In comparison, Indonesia’s household debt ratio stands at 15.8%, Hong Kong at 58%, and Singapore at 67%, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz’s comment recently.

While we are concerned about the high debt level, we should also take a closer look at the root cause. What is underneath the “debt mountain” and how can we address the issue?

The major components of household debt are housing, car, personal and credit card loans. According to Bank Negara statistics, as at April 2013, the total residential housing loans taken by Malaysians is RM316.2bil, passenger car loans amounts to RM145bil, personal loans stand at RM55.8bil, and credit card loans at RM32.3bil.

In terms of debt ratio for the four components mentioned above, housing loans account for 57.5% of the total debt, with car, personal and credit card loans accounting for 26.5%, 10% and 6% respectively (see chart).

As housing loans seem to be the biggest contributor to household debt, there are already several measures being put in place to cool the housing sector and to curb mortgage growth.

However, if we take further steps to scrutinise the breakdown of the loans, and study the interest incurred in absolute terms, and the appreciation or depreciation in value of the underlying assets, we will soon discover the source of the real burden.

Property is truly an asset, compared with a car, personal loan or credit card spending in which the value of the purchases depreciates over time.

According to the Malaysian House Price Index by the National Property Information Centre, the overall housing price in Malaysia has increased by an average of 5% every year since 2000. Thus, servicing a housing loan is like paying for “good debt” as the asset will gain in value in the long term and eventually protect us against the inflation.

On the other hand, based on car insurance calculations and accounting practice, the value of cars depreciates about 10% to 20% per year. This means that the car loan and interest is paid for item that is contracting in value every year, it is a liability instead of an asset.

In addition, based on our current structure, the average interest rate for housing loan is 4.2%. If we apply this rate across the board, the absolute interest incurred for RM316.2bil housing loan will be about RM13.3bil a year, which is only 43% in terms of absolute interest paid compared with its loan amount component of 57.5%.

Whereas, personal loans which account for only 10% of the total household debt, would incur absolute interest of 22% of overall household debt due to its high interest rate of 12%.

As mentioned in some of my previous articles, the younger generation is advised to purchase a house instead of a car first. Let’s visualise this via the following scenarios.
Let’s assume a young couple which has a household income of RM6,000. The ideal mortgage (housing loan) repayment is always one third of the income, i.e. RM2,000.
After deducting RM2,000 from their income, they will still have RM4,000 household income available.

If the couple decides to own a car, the loan repayment, petrol, parking and maintenance fees are most likely to come up to RM1,000 to RM1,500 depending on the types of car they are getting.

This leaves the family with a household income of only RM2,500 to RM3,000 provided they are just owning one car instead of two.

With the same household income, if the couple decides to utilise public transport, the monthly transport expenses may be in the range of RM300 to RM400 for two persons. They will still have a household income of RM3,600 every month after paying for house loan interest and transportation cost.

To help lessen the debt burden of the rakyat, the authorities must accelerate the effort of providing comprehensive public transportation network including MRT, buses, mini buses and taxis, to reduce public dependency on private vehicles.

A total review on the cost of car and motorcycle ownership in Malaysia would also help reduce this debt burden.

For households that wish to reduce their debt level, they should avoid the temptation of instant gratification, and instead should place importance to assets that grow in value.

When we look in detail at the household debt level of the nation, it provides more insights than the headline number at first glance. Sometimes, it is as simple as to differentiate the “healthy” debt from the rest to make a significant difference in our financial position.

FIABCI Asia-Pacific Regional secretariat chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email

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