The economic impacts of income level, interest rate, and housing price on household saving behavior in Malaysia

The purpose of this study is to examine the long run and short run relationships between interest rate, income level, housing price, and household saving in Malaysia. The data set included in this study are saving rate, real personal disposable income, housing price index, and real household saving in Malaysia. Observation of these quarterly time series data are 44, where started from first quarter of 2001 until fourth quarter of 2011. Based on the Absolute Income Hypothesis (AIH) that suggested by Burney and Khan (1992), a model with household saving as dependent variable and interest rate, income level, and housing price as independent variables are able to be constructed. There are several economic procedures employed in this study to test this model, which are ADF unit root test, Johansen and Juselius cointegration test, VECM granger causality test, CUSUM and CUSUM of squares tests, White heteroscedasticity test, generalized variance decompositions test, and generalized impulse response functions test. The result of JJ cointegration test suggesting that these four-dimensional system do not move apart and sharing one long run relationship in the long run. It enable VECM granger causality test being employed in this study to examine the long run and short run relationships of these four time series variables. In the long run, the ECT in the VECM model suggesting that housing price index able to receive the shocks from other variables and make 3.20% of adjustment in the short run in order to achieve long run equilibrium. The time taken for housing price to reach equilibrium is quite long, where approximately 31.25 quarters. In the short run, all of the independent variables able to cause household saving directly except housing price index. Housing price index can only cause household saving indirectly by influencing the personal disposable income. This result able to be explained by the wealth effect of appreciation or depreciation in housing price. According to Koskela et al. (1992), higher housing price will increase the implicit value of wealth among the house owner and thus increase the real value of personal disposable income, induce higher money spending, and resulted low saving. Besides, interest rate also able to affect household saving indirectly by bringing wealth effect to the personal disposable income. The findings from this study highlighted interest rate and housing price can be the tools to adjust household saving in the short run but as the time goes on, housing price will be getting affected. Thus, it is suggesting policy makers should have deep consideration to adjust the housing price and interest rate in order to achieve expected level of consumption and saving in Malaysia