House Demand and House Prices,  Drivers of Default and Rejection of

 HOUSE DEMAND AND HOUSE PRICES,  DRIVERS OF DEFAULT AND REJECTION OF HOUSING LOANS IN MALAYSIA: A MICRO-LEVEL PERSPECTIVE

Dr Azira Abdul Adzis (Leader)

Associate Professor Dr Lim Hock Earn

Siew Goh Yeok

Universiti  Utara Malaysia, Malaysia

and

Professor Dr Asish Saha

Flame University, India

ABSTRACT

Malaysia was reported as having high household debt to gross domestic product (GDP), reaching 89.1 % in 2015 from around 60% in 2008 (Bank Negara Financial Stability and Payments System Report, 2016). In this regard,  residential loans continue to be the largest contributor to Malaysian household debt (50.3% of the total debt), followed by personal financing (14.9%), motor vehicles financing (14.6%), non-residential loans (7.4%), securities (5.7%), credit cards (3.5%) and others (3.6%).

The Edge Malaysia on 20 February 2017 reported that housing lons defaults caused 17.3%  of the total bankruptcy cases in Malaysia. The statistics  are quite alarming as the government has taken several initiatives to increase house ownership among Malaysians, particularly among the lower-and middle-income borrowers; yet, they are still facing financial hardship due to excessive debt burden. In relation to this, little attention has been given in investigating factors that contribute to housing loans default in  Malaysia,  particularly from the micro-level perspective. Empirical research on Malaysian housing loans default based on micro-level data is limited due to the confidentiality of data. Thus, this research attempts to investigate factors influencing housing loans default in Malaysia by utilizing MBSB's individual loan accounts data.

In the aspect of loan rejection, the Financial Stability Report by BNM in 2016 reveals that rejection rate for housing loan applications has reduced from about 30% in 2014 to about 23.6% in 2016. However, the REDHA Bulletin of August 2016 contradicted the statistics - the rejection rate of residential property loan was the highest in 2016, reaching 59%. Thus, this research attempts to investigate reasons for housing loan rejections by utilizing MBSB's loan rejection data.

Ever since the 2007 sub-prime crisis in United States and its deleterious effect across the globe, movement in housing price has been on the scanner of the regulators worldwide. Reinhart and Rogoff (2008) mention that the root of the crisis to falling prices of housing in U.S. which resulted in increased defaults by borrowers with lower credit-worthiness. The complex bundling commitments through innovative instruments, which presumed to result in efficient spread of risk, resulted in opaque and illiquid asset with the fall in house prices. In their post crisis historical housing price analysis of 22 countries including Malaysia, Reinhart and Rogoff (2008) find that the decline in housing price average 35 percent over six-year period and equity price collapse 55 percent during downturn. They observe that banking crisis result in significant drop in output and rise in unemployment. In view of implications of house price movements on financial stability, it is not surprising that developments in housing market including the movement in housing prices in Malaysia have been closely monitored both by Bank Negara Malaysia (BNM) and also International Monetary Fund (IMF).

Housing demand in Malaysia is driven by population, number of households,  age profile,  levels and distribution of income, availability and cost of financing, and overnment policy. Data suggests with the projected population of 32.4 million in 2020 to 35.98 in 2030, there is going to be a perceptible shift in the demographic profile of Malaysian households. The number of households is increasing at a faster rate than the growth of which would provide further impetus to growth in housing demand. Working age population is also on a steady rise which is likely to fuel the demand further. In view of inelastic supply curve, house price would rise would rise faster.

IMF (2014) in its technical note on the housing market in Malaysia in 2013, observe that growth rate in house price registered a structural  break in 2010. It notes a wide regional variation in the house price and raise the doubt that behavior residential housing loans does not contribute to the dynamics of house prices. The report raised a red-flag that sharp rise in house price with relatively high house-hold indebtedness as a potential trigger of financial instability. The report notes that the structural dynamics of the residential housing loan at the aggregate level remained virtually unchanged and the growth rate remained high despite the introduction of macro-prudential measure by BNM and its close scrutiny of the lending  standards of banks.

Empirical research on Malaysian house demand and house price based on micro-level data is scarce due to paucity of relevant data. IMF (2014) report has also stressed the need for a deeper analysis with granular (micro level) data of house ownership by income group, collateral values, refinancing facilities or top-ups taken by Malaysian house buyers that result in "equity withdrawal" is expected to provide insight into potential  systemic risk from this  sector and would help in the design and implementation  of macro-prudential  policies  by the government.