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PETALING JAYA: Household debt is anticipated to rise next year but economists say this is not a concern as the right indicator should be the household debt-to-gross domestic product (GDP) ratio which provides an accurate reflection of household indebtedness.
With nominal GDP expected to outpace household debt growth, experts expect household debt-to-GDP ratio to be lower next year compared with this year.
The country’s economy is projected to grow between 4.5% and 5.5% in 2025, driven by strong domestic demand and strategic investments in critical sectors, including technology, manufacturing and renewable energy.
The GDP is projected to be stronger at between 4.8% and 5.3% this year compared with between 4% and 5% previously. Household debt levels reached RM1.57 trillion as of June 2024, up from RM1.53 trillion at the end of 2023.
RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek
RAM Rating Services Bhd senior economist Woon Khai Jhek told StarBiz the continued increase in debt is expected, as household debt would naturally rise in tandem with economic and population growth.Household debt levels in 2025 would likely be higher in absolute value terms compared with 2024.
“Rather than focusing solely on the absolute debt levels, a more insightful measure is the household debt-to-GDP ratio, which reflects whether debt growth is in line with income and overall economic progress.
“The ratio surged to 93.2% in 2020 during the Covid-19 pandemic due to GDP contraction and loan moratoriums but it had since improved, falling to 84.2% by the end of 2023 and 83.8% by June 2024.
“This decline in ratio indicates that household indebtedness has gradually improved,” he said.
Woon said residential property purchases remained the largest component of household debt, accounting for around 61% of the total as of June 2024.
The trend is expected to persist, with housing loan growth continuing to be the primary driver of household debt, supported by strong demand for residential property and government policies promoting home ownership.
“With nominal GDP growth likely to continue outpacing household debt growth in 2025, we should see the household debt-to-GDP ratio come in lower in 2025 compared with 2024, potentially nearing pre-pandemic levels of 82.7% in 2019,” Woon noted.
OCBC Asean senior economist Lavanya Venkateswaran.
OCBC Bank senior Asean economist Lavanya Venkateswaran said household debt was slightly lower at 83.8% of GDP of of end-June from 84.2% of GDP in 2023.
She said it would likely remain around these levels by the year-end and into 2025.
“There are two considerations for household debt. First, the debt-servicing burden for households remains manageable and we expect this will be the case, given strong wage growth and improvements in the labour markets slated for 2024 and 2025.
“Second, the composition of household debt should ideally be geared towards asset creating purchases such as property rather than solely for consumption purposes. “This is the case for Malaysia where, as of end June 2024, 61% of household debt was used for residential properties,” she noted.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid felt household debt-to-GDP ratio would remain fairly stable around 83% to 84% next year on account of continuous expansion in nominal GDP growth.
This means households would continue to have more income, allowing them to seek financing from the financial institution, he said.
He said banks would be guarded in their credit underwriting standard as elevated cost of living could pose a challenge on debt-servicing ability.
“What is more important is the quality of assets as debts can be deemed as necessities, especially for big ticket items such as housing and vehicles.
“I suppose the awareness on financial literacy has greatly improved and households would become mindful in preserving the credit score.
“Presently, households can access their Central Credit Reference Information System and CTOS reports on their own. So they can do their own due diligence before applying for financing,” Afzanizam said.
CTOS Data Systems Sdn Bhd is responsible for reporting on the financial health of individuals and businesses with its extensive database of information.
Meanwhile, MARC Ratings Bhd, in responding to queries from StarBiz, said the country’s household debt-to-GDP ratio has been notably higher compared with its Asean peers.
Over the past decade, it said the country’s average household debt-to-GDP ratio of 85.6% was significantly higher than the Asean-six median of 54.4%.
This gap highlights Malaysia’s structural preference for credit-financed consumption, especially for housing. Low interest rates and broader credit access have been key contributors to this elevated borrowing level, the rating agency said.
RAM’s Woon said the nation’s household debt-to-GDP ratio is higher than most of its Asean neighbours, except Thailand.
He said the higher ratio in Malaysia reflects the more advanced stage of financial and credit market development in the country, which facilitates greater access to loans, particularly for home purchases.
As of end-2023, Malaysia’s household debt-to-GDP ratio stood at 84.2%. This is relatively high compared with Indonesia, the Philippines and Singapore which have a household debt ratio of 9.6%, 10.8% and 54.1% respectively.
Thailand, however, is a closer comparator, with household debt exceeding 90% of GDP in recent years.
Carmelo Ferlito, Centre for Market Education (CME) CEO
Carmelo Ferlito, Centre for Market Education CEO and a faculty member at Indonesia’s Universitas Prasetiya Mulya said the household debt-to-GDP ratio is just an indicator. “So, if GDP grows faster than debt, then the ratio will ease.
“But this does not mean that people are less in debt. I believe the government should add two perspectives: education, to help people make responsible financial decisions, and promoting business consolidation in order to create more opportunities for social mobility.
“As the economy progresses through cyclical fluctuations, a high level of debt puts people at risk in the ecent of an economic downturn. High household debt is a sign of financial vulnerability and limited resilience in moments of struggle,” Ferlito said.
On a separate note, Afzanizam said household debt can be a necessity as big ticket items such as houses and vehicles may not allow the people to buy them on a cash term basis.
He said it was about striking the right balance and being prudent in managing personal finances.
It could be associated with peer pressure and influence from social media, Afzanizam said, noting the psychological factor should not be underestimated.
To ensure the household debt levels improve, MARC Ratings stated while the financial system is resilient, promoting savings over borrowings can help curb excess credit creation and increase the capital base for future investments.
Key measures include financial literacy campaigns, stricter lending guidelines and incentives for long-term savings to reduce reliance on debt to maintain living standards.
“Over the long term, policies aimed at promoting wage growth are already in progress, a necessary measure to keep pace with the rising levels of debt.
“Short term measures should focus on behavioural interventions to help individuals manage spending, set savings goals and access affordable financial planning services.“Bank Negara will continue its enhancement of macro prudential policies and monitoring of interest rate levels to ensure higher household debt is manageable,” MARC said.
OCBC’s Venkateswaran said to ensure that the household debt-to-GDP ratio improves, income growth should outpace debt accumulation. Income growth would be supported by a strong economy and higher wages, she said.
“The pace of debt accumulation has, however, increased in recent quarters to also reflect the strong economic growth but remains manageable.
“More fundamentally, provided debt servicing and the intention of debt accumulation remained sound, the risks associated with elevated household debt levels are likely to stay contained,” she said.
