What household debt means and how to manage it ?

The difference between ‘healthy’ and ‘unhealthy’ loans

I have received queries about what household debt means and the best ways to manage it.

Household debt is basically all forms of loans with interest rates taken from entities that provide financing. The loans can be secured with assets such as real estate loans (housing and commercial properties), or without any collateral such as personal and credit card loans.

Residential and commercial property loans have capital appreciation potential over the long term. According to statistics from National Property Information Centre, the annual appreciation rate for house prices has averaged 9% in the past five years.

Even if we assume the average house prices only appreciate 5% per annum, it is still an ideal asset which we can live in, and at the same time it grows in value.

If you refer to the chart above, the effective interest rate for housing loans is only 4.65%, which is lower than its annual appreciation rate.

On the other hand, the effective interest rates for car loans range from 5% to 7.5% depending on car model and loan term (effective interest rates are calculated from the advertised headline rates of 2.5% to 3% depending on the tenure of the car loan).

On top of higher effective interest rates, the value of private vehicles depreciate about 10% to 20% per year based on car insurance calculations and accounting practice.

In fact, everyone knows that the day you drive the car out of the showroom, its value drops by 15% to 25%!

The effective interest rate for personal loans is 9% to 10%, while credit card effective interest rates can go as high as 18% to 24% (again, like car loans, the effective interest rates per year are much higher than the advertised rates).

If these loans are spent on items that do not appreciate over time and on perishable items, then the depreciation rates are high and there are no returns to speak of.

The real estate loans (housing and commercial properties) that will appreciate in the longer term, can be deemed as “good debt”.

Car, personal and credit card loans, which have higher interest rates repayment and do not generate value in the future, and are considered as “unhealthy debt” or “bad debt”.

The chart above illustrates the effective interest rates on different household debt components. It also reminds me about the household debt I shared in my last article. What does our nation’s household debt really mean to us? How much of it impacts us if we include its interest rate, appreciation and depreciation values?

According to Bank Negara, our household debt was at RM940.4bil or 87.9% of gross domestic product (GDP) as of end-2014.

Large burden

Residential housing loans accounted for 45.7% (RM429.7bil) of total debts, hire purchase at 16.6%, personal financing stood at 15.7%, non-residential loan was 7.7%, securities at 6.5%, followed by credit cards and other items at 3.9%.

Our household burden is larger if we include the servicing of incurred interest rate for loans. Much of it comes from the higher interest rates to service hire purchase, personal financing and credit card loans.

It reinforces my belief that if we take a debt to invest or secure appreciating items such as housing and other valuable assets, they will eventually provide a higher return in the longer term which more than compensates for the interest rate paid on the loans.

My belief is substantiated by Bank Negara’s Financial Stability and Payment Systems Report 2014.

The report states that properties remain an important investment for many households to finance children’s education, provide a form of financial security for the next generation and preparation for retirement.

Our government can help us achieve higher investment on housing and other valuable assets by looking at ways to reduce our dependency on other types of loans.

Reducing dependency

Example, to provide a comprehensive public transportation system by aggressively expanding mass rapid transit, buses, mini buses, and taxi service to cover more areas.

This will reduce the dependency on private vehicles which in turn help us to divert our financial resources to more fruitful areas or secure a roof over our heads.

As shared in my previous article, housing loans in advanced countries comprise an average of 74% of total household debt compared with ours at 45.7%.

This tells me that we, as a nation, are spending too much of our already high household debt (87.9% to GDP) on high interest/high depreciation “bad debt” such as a car, credit card and personal loan.

Now is a good time to relook into our debt portfolio and the interest rates incurred, and check whether we are having a healthy or unhealthy debt burden.

FIABCI Asia-Pacific Regional secretariat chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

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South Korea cuts interest rate as MERS contagion as threat

SEOUL: South Korea reported a 10th MERS death as the outbreak of the potentially deadly virus forced the central bank to cut its key interest rate to ward off greater economic damage amid a slump in business.

In what has become the largest outbreak of Middle East Respiratory Syndrome (MERS) outside Saudi Arabia, a 65-year-old man died yesterday after being infected with the virus while receiving treatment for lung cancer at a hospital.

Seoul also reported 14 new cases, including the first infection of a pregnant woman. The new diagnoses brought to 122 the total number of confirmed cases in South Korea, the health ministry said.

Businesses including shopping malls, restaurants and cinemas have reported a sharp drop in sales as people shun public venues with large crowds.

Bank of Korea governor Lee Ju-yeol said slowing exports and threats to business from MERS were central to the decision to cut its benchmark rate by a quarter percentage point, to a record low of 1.5%.

It was the first cut since March, when the central bank made a surprise cut of 25 basis points.

“The full impact of the outbreak still remains uncertain but we thought it was desirable to act pre-emptively to curb its negative impact on the economy,” Lee said.

More than 54,000 foreign travellers have cancelled planned trips to South Korea so far this month, according to the Korea Tourism Board.

Hong Kong has issued a “red” alert warning against non-essential travel to South Korea.

However, Seoul says World Health Organisation guidelines do not warrant such action.

Taiwan raised its travel advisory level for South Korea but stopped short of warning its people against going at all. Other governments in Asia are urging caution but none has gone as far as Hong Kong in warning against non-essential travel.

Residents of Hong Kong are particularly sensitive after an outbreak of Severe Acute Respiratory Syndrome (SARS) killed 299 people in the city in 2003 and sparked global panic.

The MERS virus is considered a deadlier but less infectious cousin of SARS.

On Wednesday, the area around a health clinic inside a metro station in Hong Kong was cordoned off and officials donned protective gear after a woman returning from South Korea showed flu-like symptoms.

Surgical masks reportedly sold out in shops around the station, but Hong Kong officials confirmed yesterday that the woman had tested negative for MERS.

Growing public alarm has forced South Korean President Park Geun-hye to cancel a planned June 14-18 trip to the United States.

Her administration has faced a storm of criticism for perceived slow and insufficient response to the crisis.

Of the 14 new cases, eight were infected at Samsung Medical Centre in Seoul, a major hospital where 55 people have contracted the virus. That is the largest cluster in the outbreak.

A 39-year-old woman in her final trimester of pregnancy was among those confirmed yesterday to have acquired the virus at the hospital.

Another victim contracted the virus at a hospital in Hwaseong City, 40km south of Seoul, and five others are under investigation to discover how they were infected.

More than 3,800 people who came into close contact with those infected are under quarantine, either at their homes or at healthcare facilities.

The first infected patient was diagnosed on May 20 after a trip to Saudi Arabia.

The 68-year-old man visited four medical facilities, infecting other patients and medics, before he was finally diagnosed, sparking criticism that authorities had bungled the initial response. — AFP

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Why South Koreans with ‘best jobs’ take only one day off per year Young and Old Fight Over Jobs in Korea as Generation Gap Widens With...

South Koreans fight over jobs

Why South Koreans with ‘best jobs’ take only one day off per year

Young and Old Fight Over Jobs in Korea as Generation Gap Widens

With youth unemployment near a 15-year high and the government planning to raise the retirement age, intergenerational conflict over jobs is rising in South Korea.

The jobless rate for workers aged 15 to 29 touched 11 percent earlier this year and is about four times higher than for those aged 40 and above. At the other end of the spectrum, Korea has an underdeveloped pension system and the highest elderly poverty rate in the OECD, as companies push employees in their fifties into early retirement to contain costs.

An overall unemployment rate that’s close to the 10-year average belies the difficulty facing policy makers seeking to balance the needs of the young and the old as society ages and economic growth eases after the heady gains of previous decades.

Working longer would have helped Lee Jong Ho, 59, who retired from Korea Railroad Corp. two years ago and has been looking for another job ever since. Lee’s 2.2 million won ($1,970) monthly pension isn’t enough to support him and his wife, after pouring savings into raising their children.

“Healthy people like me should work at least until 70 given that the average life span of people now is easily over 80,” said Lee. “I know that extending the retirement age could mean fewer jobs for young people. I’m willing to get paid a little less if I can keep working.”

While currently there is no official retirement age in South Korea, a typical worker’s career ends around 53, government data show. After that, many try to get by on a combination of pension payments, savings, part-time work or small business ventures.

A new law taking effect next year mandates that large companies allow employees to work until at least 60.

‘Repeating Class’

Kang Jin Ho, an English major at Hankuk University of Foreign Studies in Seoul, is 26 and still trying to get into the workforce. He’s deferred graduating for years to maximize his employment chances, as many companies limit new entry hires to people still in school. Kang’s applied for more than 70 jobs already in 2015 and has been rejected every time.

“Getting a job was so much easier for my parents’ generation, when the economy was expanding fast,” he said. “The average age of job seekers in my study group is 30.”

Projections from the Organization for Economic Co-operation and Development paint a gloomy picture for Kang and the next generation of students who will follow. The number of people 65 and older in Korea will surge from 11 percent in 2010 to more than 37 percent by 2050, according to the OECD.

Park’s Plan

The unemployment rate for those aged 15 to 29 was 9.3 percent in May, Statistics Korea said Wednesday. That’s the highest figure for May in official data going back to June 1999, and compares with 2.7 percent for people 40-49 and 2.6 percent for the 50-59 group. Young people are also seeking stable jobs and many apply for the civil service exam, which pushes up the youth unemployment rate, said Sim Won Bo, director at Statistics Korea.

President Park Geun Hye’s government will next month announce its fourth set of measures in two years to help ease unemployment among the young.

Previous efforts have included improvements to career training at school and incentives for young people to join small- and medium-sized enterprises, not just the large corporate icons that dominate the public imagination.

This time around the government may begin addressing the problems faced by Lee and Kang at the same time.

Tenure System

According to a finance ministry statement in May, financial support could be offered to companies that keep on older workers, while trimming their wages and using the savings to hire more young employees. The ministry didn’t offer further details.

Labor unions have already voiced opposition to the idea of a peak-wage system, which also runs counter to cultural traditions of basing pay on tenure and age, rather than performance.

“In a rapidly aging society with weak growth momentum, you’re going to get conflict between young and old over how to divide economic benefits,” said Lee Geun Tae, an economist at the LG Economic Research Institute in Seoul. “Young people having proper jobs is important for our growth engine, but there doesn’t seem to be an easy solution.”

Source: Bloomberg by Kim ChipmanCynthia Kim

Retirement Redesigned

Baby Boomers, Work and the Endless Vacation

By Victoria Stilwell and Roger Runningen | Updated Jun 10, 2015 4:20 PM EDT

The baby boom generation already has left its mark on music, fitness and politics. Next up: retirement. While some people dream of the same “golden age” of relaxation, sun and travel their parents enjoyed, many more have looked at the numbers and decided they have to keep working. (It takes a lot of savings to finance a 30-year vacation.) For others, working is a choice. (Why give up a good income and fulfilling career?) Either way, the generation famous for rewriting the rules is now reshaping life after 65.

The Situation

Demographics are forcing changes in expectations for retirement. The number of senior citizens worldwide will swell to 714 million in 2020 from 601 million in 2015, straining government benefit plans. Meanwhile, the world’s birthrate is declining. Fewer workers mean fewer people paying into pension programs. So governments are encouraging or forcing people to work longer. Twenty percent of people over 65 are still working in Japan, whose median age of 46.1 gives it the world’s second-oldest population (surpassed only by Monaco at 51.1). There’s room for growth: Surveys show 80 percent of Japanese seniors want to work. Some are finding it hard to live comfortably on pensions alone. Others share the feelings of a 69-year-old who said: “Life is boring without work.”


Source: Bureau of Labor Statistics


The Background

German Chancellor Otto von Bismarck offered the elderly the world’s first national old-age pension system in 1889. In the U.S., the first private pension plan was begun by American Express in 1875. By 1929, one-tenth of the American work force was covered under company pension plans. Yet that same year, even before the Great Depression hit, 56 percent of Americans 65 and older couldn’t support themselves. The Social Security law that passed in 1935 included a pension plan. During World War II, wage controls in the U.S. led employers to offer pensions as a way to attract workers. Private pensions expanded through the 1970s until they covered almost half of American workers. By the 1950s, retirees had money to spend and they wanted to play. The number of golf courses in the U.S. doubled from about 5,000 in the 1950s to more than 10,000 in the 1980s. America’s first retirement community, Sun City, opened outside of Phoenix in 1960. Tours and programs designed for older travelers, such as Elderhostel, founded in 1975, helped them see the world. Things began to change in 1980 with the introduction of 401(k) plans, which allowed U.S. workers to avoid taxes on income put aside for retirement. Subsequent tax-law changes removed incentives for companies to maintain traditional pension plans. Savings plans that relied on the stock market lost value with every crash and tough economic times caused many to take early withdrawals from their retirement savings. Fewer U.S. homeowners reaching retirement age have paid off their mortgages. The result: American baby boomers are poorer than their parents who golfed, lived in sunny climates and traveled.

The Argument

Baby boomers are starting retirement without much in the bank. More than one-fifth of Americans 65 and older are working and more people expect to work past traditional retirement age. They may be needed — certain industries, like construction and manufacturing, are facing shortages of skilled workers. Healthy seniors often want to stay on the job even if they don’t need the money, though in areas like academia this may be preventing younger people from advancing. Governments are certainly encouraging older people to work. In 2011, the U.K. abolished its default retirement age of 65; most people can now work as long as they want. The graying of the workforce is likely to continue. When asked what age they expect to retire, 10 percent of American baby boomers say “never.”

The Reference Shelf

Gallup has a series of polls on baby boomers and retirement.

Financial Times Magazine article, “How Japan stood up to old age.”

Bloomberg Visual Data on the impact of an aging world population.

National Public Radio interviewed older workers for its series, “Working Late.”

PBS NewsHour interactive report, “New Adventures for Older Workers.

First Published Sept. 18, 2014
To contact the writer of this QuickTake:

Victoria Stilwell at vstilwell1@bloomberg.net

To contact the editor responsible for this QuickTake:
Anne Cronin at acronin14@bloomberg.net

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