Increasing household debts and its relation to GDP, interest rate and house price: Malaysia’s perspective

Rahman, Sharezan and Masih, Mansur (2014): Increasing household debts and its relation to GDP, interest rate and house price: Malaysia’s perspective.

Abstract

The increase in household debts in Malaysia which has escalated to about 86% of total GDP is deemed to be at worrying stage as it may in turn trigger another financial crisis. Thus, the aim of this study is to examine the increase in household debts and its relation to GDP, interest rate and house price via time series techniques. Data collected from Datastream and monthly statistical bulletin span from 1999 to 2014 on quarterly basis. The results show that there is a cointegrating long run relation between household debt, house prices, GDP and interest rate. The analysis indicates that although household debts could not be influenced by the changes in GDP, lending rate and house price in the short run, it could be affected by house price movement in the long run. As there is a positive significant relationship between house price and household debts, it implies that, in the long run horizon, the increase in household debts is due to the increase in house price. Although both GDP and lending rate are found to be endogenous, we still believe that the movement in lending rate and GDP (as a proxy to income) may affect the household debts. Thus, extra care shall be taken by the policy maker for any decision to increase the lending rate in particular as the lending rate is deemed to be one of the macroeconomic policy instruments which may have significant influence on household income. As the lending rate is deemed endogenous, the policy maker should strengthen prudential measure in order to curb the increase in household debts. Shortening the loan tenure, tightening credit policy by implementing responsible and selective lending, higher debt service ratio, strengthening the risk management of banking institutions are amongst the measures that might facilitate the policy maker to combat the rising household debts. Additionally, as the result found that the house price is the main indicator that affects the household debt in the long horizon, the policy maker should take an initiative to control the property price in order to mitigate any bubble in asset price.

• Item Type: MPRA Paper
• Language: English
• Keywords: Household debts, GDP, interest rates, house prices, time series techniques
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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