Indicators of households' financial situation
Loans are households' most important financial liabilities and significantly affect their financial position. A deterioration in households' financial position can negatively affect consumption in the future. Indicators of households' financial situation are routinely used for such analyses. The key indicators include households' ratio of debt and interest expenses to gross disposable income and their ratio of debt to financial and non-financial assets.
Chart 1 (Box)
The ratio of household debt to disposable income has increased in the past years (percentages)
The ratio of household debt 1 to gross disposable income has increased over the past three years, from 12.1% in 2000 to 18.2% in 2003. Housing loans have recorded particularly strong growth. An increase in this indicator accompanied by monetary fluctuations, i.e. higher-than-expected interest rate growth, a decline in disposable income or a rise in unemployment, could reduce households' ability to repay loans from current disposable income and hence reduce consumption in the period ahead. 2 By international comparison 3 the ratio of households' debt to disposable income in the Czech Republic is currently lower than in the EU (75%) and Hungary (28.2%).
Conversely, a lower ratio of interest expenses to disposable income might in the longer run reduce households' financial vulnerability and affect growth in future consumption. This usually constitutes a close linkage between households' debt burden and the consumption forecast. In the economic literature, the effect of monetary policy on the indebtedness ratio is closely connected with households' demand for residential properties and consumer durables, despite the generally weak linkage between monetary policy and the long-term real interest rate. In the past three years, the ratio of interest expenses to disposable income has stayed at the long-term average of 1.8%, thanks mainly to the low level of interest rates. In Hungary in 2003 this ratio was higher (3%-4%) 4.
1Household debt includes loans from monetary and non-monetary financial institutions.
2Also significant as regards consumption is the change in the debt/income ratio with regard to the age and income structure of households. The life cycle theory suggests that younger people with lower income will have larger debts in relation to future income and hence will be more vulnerable during sudden monetary fluctuations. Conversely, older households have a lower rate of growth of indebtedness and thanks to their financial reserves are considered less vulnerable.
3The figures for the euro area average are for 2002 and those for Hungary, with its comparable economic level, are for 2003. The data are taken from the Hungarian central bank's Report on Financial Stability for 2003.
Chart 2 (Box)
The ratio interest expenses to disposable income reached its long-term average in 2004 Q2 (percentages)
The high rate of growth of loans has in the longer run resulted in growing financial liabilities and a deteriorating financial balance of households. Moreover, the growth in household indebtedness has not been accompanied by corresponding formation of financial assets in the form of savings. This is reflected in a rising ratio of household debt to financial assets, from 9.5% in 2000 to 13.8% in 2003 and 15% in June 2004. The analogous ratio in the EU was approximately 28.7% and that in Hungary 22.2%. The formation of financial assets, and in particular the liquid components there of in the form of cash and bank deposits, is significant as regards repaying loans during periods of financial hardship and hence as regards ensuring smooth consumption financing going forward.
Chart 3 (Box)
The household debt-financial assets ratio increased (percentages)
The ratio of households' debt to total wealth, comprising both financial and non-financial assets, has stayed at approximately 5% in the past. This also reflects growth in prices of residential properties affecting the value of new loans and non-financial assets. As regards the implication for the consumption forecast, collateral value is of importance. Any reduction in this value could negatively affect the wealth and consumption of some households in the period ahead.
4No analogous indicator is available for the EU average.
Chart 4 (Box)
The financial balance of households has been deteriorating over the longer run (net financial assets as a percentage of gross disposable income, percentages)
The indicators of households' financial situation indicate that the growing debt has been accompanied in the longer term by growing costs in the form of repayments of loan principal and low formation of liquid financial assets. This has passed through into a deterioration of households' liquidity situation, which could, given an increase in the fixed mortgage interest rate, have implications for the consumption of some households going forward. Nevertheless, expectations of economic growth accompanied by stable growth in disposable income and easy real monetary conditions should help to ensure the financial stability of households and the fulfilment of the consumption forecast.