Housing bubble, affordability and credit risk to banks: a Malaysian perspective

Alex Kae Lun Lee, Jothee Sinnakkannu, Sockalingam R. Ramasamy

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Abstract

The continued rise in house prices has sparked increasing interest in housing affordability in Malaysia. Middle-income-earning buyers, who fear that house prices may increase to a level beyond their future financial capacity, took on excessive leverage and overextended their current financial capacity. This increases their probability of default, which is unfavourable to the banking industry providing these mortgages. This study examined the impact of rising house prices on housing affordability in three urban regions in Malaysia and found that house prices in these cities, especially landed houses, were unaffordable for middle-income-earners. This study also examined the impact of a collateral valuation loss to the banking system from the potential decline in house prices, by employing a solvency stress test. The study found that the banking system remained fairly capitalised to survive a mild single-risk factor financial shock of the equivalent of house price declines in the 1997 Asian Financial Crisis.

Original languageEnglish
Pages (from-to)619-652
Number of pages34
JournalJournal of the Asia Pacific Economy
Volume26
Issue number4
DOIs
Publication statusPublished - 15 Oct 2020

Keywords

  • credit risk
  • Housing affordability
  • mortgage
  • solvency stress test

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