BNM runs stress tests to see if Malaysians can survive sharp dive in house values, income

Justin Ong
A man exercises on the balcony as people stay in their homes during the movement control order in Kuala Lumpur March 29, 2020. — Picture by Firdaus Latif

KUALA LUMPUR, April 3 — A Bank Negara Malaysia (BNM) simulation of a housing price shock concluded that 3.4 per cent of borrowers were at risk of loan delinquency if their home’s value declined by 50 per cent.

The central bank’s Financial Stability Review 2019 report included the findings of stress tests it performed on scenarios where home prices and incomes fell sharply due to economic turmoil.

The tests examined how borrowers would react in the event their income fell enough that repaying loans meant foregoing basic needs, if their home value became less than what they owed, or both.

It concluded that most would choose to dip into their retirement savings or borrow informally to avoid becoming delinquent, due largely to the harm this would do to their creditworthiness.

“Defaulting is also unfavourable for owner-occupiers, who account for the majority (82 per cent) of Malaysian housing loan borrowers, as this would result in the borrowers losing their homes.

“However, households with negative financial margin and negative equity are in a particularly perilous position as they lack both the incentive and means to repay their loan,” the report said.

In a scenario where home prices alone fell by 20 per cent, similar to what occurred after the 1997 Asian Financial Crisis, at-risk borrowers would rise to 2 per cent from the baseline figure of 0.1 per cent.

For the second scenario in which property prices halved, effectively wiping out nine years of accumulated appreciation, the proportion of vulnerable borrowers was 3.4 per cent.

In the final scenario where household income falls 10 per cent and home values decline by 20 per cent, at-risk borrowers were also 3.4 per cent.

However, the second scenario was more damaging for lenders, with BNM estimating their capital losses to be RM58 billion versus RM38.6 billion for scenario two. The first would wipe out RM21.8 billion in Malaysian banks’ capital.

Those most likely to be at-risk borrowers in the third scenario with the “Double Trigger” are typically highly-leveraged households in the Klang Valley, Johor and Penang, due to the likelihood that they took out larger mortgages to be able to buy homes in these areas.

“The results affirm the ability of banks and most households to withstand even severe house price and income shocks.

“These results can be attributed to generally prudent loan affordability standards applied by banks when extending loans to households, and the strong levels of capitalisation maintained by Malaysian banks,” BNM said.

It also went on to repeat its previous assessment that home prices in the country were seriously unaffordable relative to Malaysian households’ income levels.

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