Implications of household debt for consumption

Household debt and household consumption are closely interlinked. In the long run, which this Box concentrates on, rising debt may slow consumption and increase its sensitivity to various shocks.

In the case of a higher debt burden, households can avoid a decline in thein consumption primarily by reducing their savings. However, households with košer money incomes usually have limited options in this respect, as they have košer savings than households with higher incomes (in 2004 the ratio of new saving deposits to net money income was 1.8% among the 20% of households with the lowest incomes, while the figure for households with the highest incomes was 11.4%).11 The implications of debt for consumption and higher sensitivity of consumption to potential shocks (e.g. a change in interest rates or a change of employment) are therefore most probable for low-income households.

Charts 1 and 2 (Box) show the debt burden of households by income group in more detail.

Chart 1 reveals that the highest absolute volume of newly received loans and hire purchase in 2001-2004 was recorded for households with the highest incomes.

On the other hand, Chart 2 shows that the debt burden on households with the lowest and highest incomes was much higher than that on medium-income households in the same period. However, the strongest growth in debt burden occurred in the first, second and third groups of households.

Another channel through which debt can affect consumption relates specifically to loans for house purchase. Whereas households with high incomes are generally able to borrow up to 100% of the purchase price of the property they want to buy, households with lower money incomes usually have to finance part of the purchase price from their own sources. A one percentage point rise in debt burden in the area of loans for house purchase will thus generally have a greater downward effect on the consumption of low-income households than high-income households. It is reasonable to assume that loans for house purchase are taken out mainly by high-income households and hence that this effect does not play a major role at present. Nonetheless, certain tendencies supporting this effect can be observed in the structure of gross money expenditure, where all income groups of households except for the highest-income group have in recent years recorded a decreasing share of expenditure on consumption and a rising share of expenditure on property purchases/reconstructions. Households with the highest incomes have shown the opposite trend.

To sum up, the observed rise in debt so far suggests potential impacts primarily on consumption by households with lower money incomes.