Macroeconomic Determinants and Mortgage Debt Accumulation: Evidence from Malaysia

Abstract

The statistics of the household debt in Malaysia is among the highest in the ASEAN region with the biggest portion of the household debt goes to pay off the mortgage debt. As accommodation is one of the basic needs required by all households regardless of the price offered, concerns are given to the household affordability to live in a decent economy. The escalating trend of household debts related to mortgage is due to the increase in house prices, fluctuation in interest rates and speculative activities taken by investors. Thus, the aim of the study is to examine the relationship of principal drivers on mortgage debt accumulation using macroeconomic determinants. The macroeconomic determinants were represented by house price index (HPI), interest rate (IR), gross domestic product (GDP) and living cost (LC). The data set was analyzed between the period of 2006 till 2016 on a quarterly basis. Multiple regression analysis was applied to test the statistical relationship between the macroeconomic determinants and the mortgage debt. Several diagnostic tests also being conducted to ensure that the proposed model in this study adequately describes the time series under consideration. The empirical findings revealed that the accumulation of mortgage debt in Malaysia is driven primarily by three key factors: house price index, interest rate, and living cost. The living cost has been identified as the most significant factor that leads to high accumulation of mortgage debt in Malaysia. However, income (which is represented by GDP) does not give any significant impact towards the accumulation of mortgage debt. This implies that capital appreciation in the property market has made households stretch out their mortgage financing to own a house to fulfill their basic needs; without considering their level of income. The implication of this study is critical to deliberate for further analysis as easy access to mortgage debt may lead to default or sub-prime crisis. By understanding the principal macroeconomic drivers that influence the accumulation of mortgage debt, this would contribute to the body of knowledge, and subsequently the legislator who can take the necessary actions to mitigate the issues of escalating prices in the property market, and how best to balance between the macroeconomic policy and the related policies designed to stabilize the housing market, and to contain the mortgage debt from upward bubbling.