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Tug Of War Behind Asset Inflation
Malaysia Perspective | 30 April 2012

By Yang Min Wang

Despite starting the year with poor financial figures, and the likelihood that the economy in the first half of the year will be slower than last year, the Malaysian stock market ended the first quarter of this year on a record high. The FTSE KLSE Composite Index even breached the 1,600 level for the first time in history to close the first trading day of the second quarter at 1,603.96.

Of course, the bull-run rampage around the transition period between the first and second quarter may not last, especially given that the upcoming general election may lead to the market weakening. Nevertheless, this development showed that asset inflation has not been reined in even when Bank Negara has begun to implement cautionary lending measures. Apart from the stock market, the housing market also did not show any signs that it has been affected by such measures.  

Housing Market Not Letting Up
The Property Services and Valuation Bureau under the Ministry of Finance released its 2011 property market report in early April. According to this report, real estate transactions in 2011 increased by 14.3 percent over the previous year to more than 430,000 cases; more tellingly, the value transacted showed a sharp increase of more than 28 percent.

Malaysia’s property market is not showing signs that it is slowing, even though Bank Negara put in place curbing measures such as capping the third housing loan amount at 70 percent last year and using net income as the basis for approving loans this year. Datuk Donald Lim, Deputy Minister of Finance, who launched the said report, also warned that the government will continue to impose strict controls to avoid an overheated real estate market.

According to the deputy finance minister, it is healthy and normal for property prices to rise by 10 to 15 percent each year. Anything higher than this will prompt the Ministry of Finance to impose a higher property profits tax in next year’s budget to rein in excessive rises in property prices.

Household Debt Is High But Not At Dangerous Level
The progressive measures introduced by Bank Negara last year were to prevent household debt levels from getting too high – following good economic growth in the previous years that boosted domestic demands – the banking system was alerted that its household debt to gross domestic product ratio had reached a warning level of 76.6 percent.

After the introduction of a 70 percent cap on third housing loans last year, and the precautionary measure of using net income as the basis for approving loans this year, Bank Negara expressed satisfaction with the current situation in its annual report released in end-March. Bank Negara reasoned that rise in household loans have retreated from 13.7 percent in 2010 to 12.5 percent, while the growth rate of multiple mortgages have dropped from 14.9 percent to 2.9 percent.

More importantly, all mortgages are deemed safe, with the ratio of mortgaged assets to loan amounts reaching as much as 2.3 times. Bank Negara is, however, more concerned that loans taken up by low-income families in urban areas accounted for 4.4 to 9.6 times of their income. Nevertheless, Bank Negara assured that these loans, which totalled RM127.4 billion, accounted for less than 13 percent of the total loans in the banking system and would not pose a danger to the banking system.

Abundant Hot Money Pushing The Stock Market To New Highs
After the assuring annual report of Bank Negara on the state of household loans, its February edition of its monthly Monetary and Financial Development Report showed that household loans continue to grow by more than 12 percent, which was comparable with the 12.5 percent last year. It reported that instead of easing off, hot money in the market continued to increase. The loans to deposits ratio fell below the 80 percent level, while the financing to deposit ratio also fell. The net result was a market flooded with excess hot money, which propelled the stock market to new highs in end-March and early-April.

These two reports from Bank Negara revealed its ‘tug-of-war’ approach to rein in the mounting household loans and asset inflation situation. On one side, Bank Negara has to make sure that these two phenomena will not grow out of hand by adopting moderate precautionary measures; on the other side, it needs to ensure that these two asset markets – the stock market and property market – continue to flourish so as to maintain strong domestic demands, which will in turn ensure economic growth to meet the government’s target.

This ‘tug-of-war’ tactic had set off a round of asset inflation before, so we need to monitor its development closely.

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