Households continued to have a strong aggregate financial position last year, supported by income growth and improved employment conditions. The strong recovery of the domestic economy saw more new job positions created, while unemployment rate continued to improve.
This allowed the majority of households to adjust to the rise in food prices, transportation costs and borrowing costs, while preserving their debt-servicing capacity.
Meanwhile, the household debt level continued to expand at a faster pace of 12.5% in 2010, reflecting a rebound in consumer sentiment. The ratio of household debt-to-gross domestic product remained almost unchanged at 75.9%.
While higher in comparison with other regional economies, risks of financial stress in the household sector remain limited at present, as the debt level is comfortably supported by a high level of deposits and other forms of savings.
Debt coverage, as measured by the household financial asset-to-debt ratio, is more than two times of household debts.
Delinquency rate is also low at 2.3% of total banking system household financing and has been on a sustained improving trend over the recent decade.
Financial assets of households expanded at 13.1% (2009: 14.9%) for the year. The growth in household financial assets was mainly attributed to the strong performance of the equity market, which bolstered market valuations and holdings of equity by households.
With one third of household financial assets in the form of equity, households are susceptible to volatile swings in equity prices as observed in 2008, when a 39.3% fall in the FBM KLCI precipitated a decline in household financial assets.
This, in turn, may subject household financial position to the vagaries of the equity market. The impact from valuation movements in the equity investments of households is mitigated by household financial assets represented by deposits with financial institutions, which continue to provide a comfortable buffer to support households’ debt-servicing ability. As at end-2010, the ratio of financial asset-to-debt remained relatively unchanged at 238.4%, with more than 60% of the financial assets held in the form of highly liquid assets.
Liabilities of households expanded at a slower rate relative to financial assets in 2010. The growth was led mainly by financing for the purchase of properties and for personal use. The pace of growth, however, was higher than the previous year (12.5%; 2009: 9.4%), although this has largely been offset by a corresponding increase in personal disposable income at the aggregate level.
Meanwhile, assessments on banks’ underwriting practices so far indicate that the extension of financing on competitive terms such as below base lending rate financing rates and extended tenures, have largely been confined to customers that met stringent internal credit standards including those with good financial track records.
These practices support the continued and improving low delinquency rate for financing to households for the purchase of property which stood at 3.2% of housing loans extended by the banking system (2009: 4.3%).