Soaring
household debt in Asia is one of the starkest legacies of the post-2008
low rates world order. If 10 years ago US households stood out as some
of the most leveraged in the world, today, Asia is home to the highest
household debt globally.
But some Asian countries, even those with household debt equal to over 80 per cent of GDP, are faring better than others.
Countries
where debt has grown gradually and where regulators implemented
pre-emptive macro prudential policies are more likely to minimise blows
to economic growth.
Those with reactive regulatory bodies and where household debt surged
in just a few years are more at risk, according to analysts and
economists. Malaysia and Thailand are at the top of this list.
Domestic credit growth and swelling household debt have kept many
Asian economies humming, even in the face of weak external demand from
the west after 2008. Asian banks are, to a large extent, capitalised
enough to bear the brunt of high household debt. But if other economic
sectors start faltering, these obligations could start eroding GDP
growth.
“Household debt is a growth problem, not a financial system problem,”
argues Frederic Neumann, co-head of Asian economic research at HSBC in
Hong Kong.
If debt becomes unsustainable and households deleverage, consumer
spending will choke, consumer confidence will wane and positive momentum
will slow — a perfect recipe to squeeze economic growth.
Asian property markets — which have been on
household debt steroids since 2008 — could be the first to burst. In
November 2015, housing transaction volumes in Hong Kong — the world’s least affordable housing market — were the lowest on record.
“Prices have not dropped because people are not forced to sell yet.
But what if interest rates increase more than expected? What if we get
another taper tantrum? Hong Kong property prices will just drop,” warns
Mr Neumann.
Now that slumping commodity prices and weakening Chinese demand are
softening export markets, Asian countries would not be able to fall back
on the external sector if their domestic economies underperform.
Malaysia’s and Thailand’s household debt to GDP ratios almost doubled
between 2008 and 2014 to nearly 90 per cent. Thailand’s tax breaks on
vehicle and housing purchases and Malaysia’s favourable credit
conditions and strong consumer demand accelerated the increase.
Worryingly,
these levels resemble household debt in the US on the eve of the
subprime crisis, when it peaked at 100 per cent of GDP in 2006 and 2007.
The main difference is that Malaysia’s and Thailand’s nominal GDP in
2014 was around a 40th of the US’s in 2006.
Nevertheless, household debt to personal disposable income in
Malaysia, Thailand, Singapore, South Korea and Taiwan is either higher
than or as high as it was in the US in 2007, according to Deloitte.
Lending
to households is slowing in Malaysia and Thailand thanks to regulatory
reforms targeting personal unsecured loans and low-income households.
But the fact that household debt to income ratios remain high in spite
of these reforms is telling. Malaysian and Thai regulators were reactive
at best and too late at worst.
More developed Asian economies are also grappling with high household
debt. Data in 2014 ranged from 65 per cent (Hong Kong) to 83 per cent
of GDP (Taiwan). But unlike Malaysia and Thailand, this debt has grown
gradually and regulators implemented household debt policies very early
on.
South Korea is a clear example.
“Household debt in Korea has been high for some time now,” says Marie
Diron, senior vice-president for credit policy at Moody’s. “What would
make it unsustainable now? Interest rates are low, unemployment is low
and debt affordability is high. I don’t think banks will face repayment
difficulties.”
Even pre-2008, South Korean regulators pioneered the use of loan to
value ratios, debt to income ratios, and geographic lending
restrictions: real estate in areas with soaring property prices required
higher down payments. Hong Kong also introduced loan to value ratios
and, together with Singapore, raised the stamp duty to cool property
prices down.
In Taiwan, where Taipei home prices grew to about 15 times income in
2014, the central bank capped the loan-to-value ratio on new housing
loans taken out by borrowers with two or more outstanding mortgages at
50 per cent.
Across the Strait, mainland China’s household debt has also
accelerated — it has doubled since 2008 — but still only accounts for 36
per cent of GDP (as of 2014). Ballooning local government and corporate
debt are more pressing matters for Chinese regulators.
Surging household debt has not set off a crisis
since most Asian economies can fall back on sturdy banking sectors.
Since the 1997 financial crisis, Asian banks have been less reliant on
foreign capital and are ahead of the game in terms of tier one capital
and profits. More than half world banking profits are now generated in
Asia, and Chinese banks have the highest tier one capital in the world, according to The Banker, an FT publication.
