Dive into the currents of Malaysia's household debt crisis and discover its implications for households nationwide. Can we keep our heads above water?
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06 Jun 2024
6 Min Read
Afrina Arfa (Alumni Writer)
Dive into the currents of Malaysia's household debt crisis and discover its implications for households nationwide. Can we keep our heads above water?
Malaysia's economic outlook appeared promising in the first quarter of 2024, boasting a growth rate of 4.2%, fueled by stronger private expenditure and higher household spending. However, this positive trend is overshadowed by a growing concern. Amid meagre wage growth and soaring living costs, the rise in household spending can only be sustained through increased debt levels, highlighting the pressing issue of escalating household debt. At the close of 2023, Malaysia's household debt had reached RM1.53 trillion, with the household debt-to-GDP ratio standing at 84.2%.
This sharp rise in debt is more than just a statistic; it is a sign of a looming crisis with far-reaching consequences. While housing loans constitute the largest portion of household debt, the issue extends beyond mortgages. Car loans, education loans, and the easy accessibility of credit from financial institutions have all contributed to the increase in debt. As household debt rapidly climbs into the danger zone, it risks becoming unpayable, threatening the financial well-being of Malaysians and the stability of the Malaysian economy.
Making up 60.5% of all household debt in the nation, housing loans shoulder much of the responsibility for the increase. From 2022 to 2023, prices in the housing market rose by 4.1%, increasing at double the rate of income. Nevertheless, the allure of homeownership remains strong among many in the country, as evidenced by the active property market in the first quarter of 2024. During this period, there were more than 104,297 transactions worth RM56.53 billion, reflecting a 34.3% jump in value compared to the first quarter of 2023. Given that the majority of the population typically opts for loans ranging from 80% to 90% loans of the home purchase price, the total approved loans amounted to RM37.8 billion for the first two months of 2024, indicating a 14.2% increase over the same period in the previous year.
While housing loans continue to be the primary contributor to household debt due to their significant expense, the purchase of vehicles also plays a substantial role, given that they are often perceived as more attractive and financially viable. Vehicle loans account for 13.2% of household debt, trailing mortgages in second place. Close to 80% of Proton and Perodua car buyers opt for loan periods of up to 9 years or more, with the number of registered vehicles in Malaysia exceeding the country's population in 2023. Despite the younger generation typically having limited financial stability and earnings due to fewer years of work experience, research has found that 73% of 1,077 Malaysians aged between 18 and 40 are already in debt, with 30% owing to vehicle loans, 28% to education loans, and 16% to mortgages.
Paired with COVID-19 pandemic-induced financial constraints and shifts in lifestyle patterns, the emergence of fintech and other digital lending platforms has further streamlined access to borrowing. In addition to relying on traditional banking for larger expenses such as mortgages and vehicle purchases, individuals are now turning to Buy Now Pay Later (BNPL) schemes to finance their daily expenses. This increased accessibility has led to a rise in personal loans and debts as individuals make bulk purchases using funds they do not possess, subsequently incurring additional charges for late payments.
Enabled by effortless access to credit, the consumer landscape has undergone a significant shift across multiple generations. The rise in living costs and the aspiration for a higher standard of living, especially among urban populations, combined with stagnant wages, have compelled many to rely on credit for essential and discretionary spending. Inflation and corresponding high prices have Malaysians grappling with ever-increasing costs of living. The Household Expenditure Survey published by the Department of Statistics Malaysia (DOSM) revealed that, on average, Malaysians spend RM229 per month on communications, representing a 950% increase from RM24 in 1993. Additionally, spending on housing, water, electricity, and gas has increased by 440%, from RM245 per month in 1993 to RM1,068 per month in 2019. Spending on groceries and eating in restaurants has risen by 280% and 440%, respectively. Overall, spending has roughly quadrupled since 1993, from RM1,161 to RM4,534 per month, while the median income has only slightly increased from RM1,500 to RM2,062 from 2010 to 2020.
For the majority of the younger generation in the nation who have entered the employment market in recent years, their salaries have yet to keep up with the increasing cost of living. Despite working hard, purchasing power has undoubtedly eroded, forcing many to rely on credit to bridge the gap between their income and expenses. According to a study, 84% of Gen Z consumers had at least one credit card as of the fourth quarter of 2023, compared to 61% of Millennial consumers a decade earlier. Moreover, there are approximately 2.9 million active BNPL users in Malaysia, most of whom are lower-income borrowers, with over 80% earning less than RM3,000 a month. Among them, 44% were aged between 21 and 30. As of the third quarter of 2023, the outstanding balance for BNPL transactions stood at RM0.9 billion, whereas credit card debt stood at RM40.3 billion.
With financial issues weighing heavily on young minds, coupled with property prices that are multiple times higher than annual household incomes, it is unsurprising that individuals are unable and unwilling to afford a home. As individuals accumulate debt to persevere through the current economic conditions, and subsequently acquire more debt to manage their existing debt obligations, it perpetuates a cycle of indebtedness that brings further repercussions.
While bank loans and BNPL schemes provide immediate relief from the burden of making large purchases, the long-term effects of frequent and high interest rates, combined with the burden of multiple loans, can significantly impact both individuals and the economy. The burden of debt disproportionately affects lower-income households, leading to a depletion of savings for families struggling to meet their monthly payments. Large household debt places both mental and financial strain on individuals, leaving them vulnerable to economic shocks like the COVID-19 pandemic.
Although arguments supporting the increase in household debt have emphasised its role in boosting consumption and GDP growth, the long-run effects outweigh the benefits. Over time, high household debt will decrease purchasing power significantly, thereby slowing the economy and increasing poverty and bankruptcy rates in Malaysia. Despite the government's initiative to alleviate the burden by allowing applications for special Employees Provident Fund (EPF) withdrawal, contributors who have exhausted their savings will resort to taking out loans from financial institutions to pay their loan expenses. However, in response to the announcement of the dangerously high household debt levels, the government is implementing structural changes and reforming the domestic economy, offering aid to those facing difficulties in repaying debt.
With one of Southeast Asia's highest household debt-to-GDP ratios, Malaysia stands at a pivotal moment in its economic recovery from recent years. Despite government efforts and assurances from Bank Negara Malaysia to safeguard the country's financial stability, escalating household debt remains a critical issue with profound implications for individuals and the economy, emphasising the need for further action.
Addressing the crisis is, therefore, not solely the government's responsibility but that of all stakeholders. While policymakers work on implementing and enforcing regulations that promote responsible lending and borrowing practices, financial institutions—especially digital lending platforms—must increase transparency in discussing their terms. Meanwhile, individuals like you and me must be equipped to make informed financial decisions despite unfavourable economic conditions, mitigate the risks associated with debt, and learn to live within our means.
Afrina Arfa is a Bachelor of Finance and Economics (Honours) alumna of Taylor's University. She spends her time indulging in economic news, hoping to inspire others to think beyond the constraints of society.
