This research paper focuses on the increase in household debt that many SEACEN economies have been experiencing since the 2010. In particular, the paper shed lights on the link between house prices and household debt. Simialr to advanced economies, asset prices are key drivers of household debt surge because higher house prices lead to more debt in the future, with important implications for real variables. As asset prices are found to be a good predictors for recessions, a negative shock to asset prices can lower lending and GDP growth. This paper investigates such macro-financial linkage through the lends of a dynamic stochastic general equilibrium (DSGE) model applied to Malaysia. Results show that productivity and house preference shocks generate a contemporaneous increase in household debt and house prices. Also an increase in income class, i.e., larger share of top and middle income classes, boosts house prices and household debt. Increasing household debt is also driven by accommodative monetary policy and by a slowdown in the construction sector.
From the recent experience of the global financial crisis, we have learnt that increases in household debt may raise the likelihood of a financial crisis and could lower economic growth. Therefore, monitoring household debt and house prices is important.
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