Factors Affecting Accumulation of Household Debts in Malaysia

Abstract

Since 2000, the ratio of debt to income among Malaysian households has been showing an upward trend. This paper examines the factors affecting accumulation of household loansinto two main categories, housing loans and consumption loans. The purpose of this separation is to study the impact of savings on housing loans and consumption loans individually, which has not been researched in a Malaysian context prior to this. By adopting the Vector Error Correction Model (VECM), we found that cost of living, house prices and savings impacts accumulation of housing loans and consumption loans differently. There is a positive relationship between savings to housing loans. Cost of living on the other hand has a negative relationship with accumulation of consumption loans. House prices is negatively related to consumption loans. This study fills in the literature gap on the impact of household’s savings on accumulation of both housing and consumption loans. Among the policy implications proposed by this paper is to rectify and influencethe root causes of inflation.