Household debt by income group in 2006 and its impact on consumption
Household debt increased as a percentage of gross disposable income in 2006, reaching the 40% level. In terms of the sensitivity of consumption to unexpected changes in interest rates etc., it is important to break the debt down by household income group. According to recently published CZSO family accounts data, high-income households continued to borrow the most in 2006 (see Chart 1).
However, the ratio of newly received loans to net money income rose in low- and medium-income households (most of all in the second and seventh deciles), while declining in higher-income households (see Chart 2).
Linked with the impacts of household debt on consumption is to what extent loan repayments (i.e. repayments of principal and interest) burden the income of households and, furthermore, what their saving rate is. Growth in the debt burden makes consumption more sensitive to unexpected changes in interest rates and increases the risk of default. The debt burden of households, as measured by the ratio of repayments to net money income, was 4.3% in 2006. Growth was recorded for most income groups, in particular low- and medium-income households (see Chart 3). The rising debt burden reflected growth in both principal repayments and interest payments. In lower-income households, moreover, it was affected by slower annual income growth. The saving rate is important for smoothing consumption in the event of shocks. The saving rate is low in low-income households (in the first decile the ratio of new savings deposits to net money income was -1.3%) and high in high-income households (11.5% in the tenth decile). The saving rate decreased in both low- and medium-income households in 2006 compared to 2005.
The loan structure is also a significant factor in households’ consumption behaviour. In 2006, 13% of households on average had loans for house purchase. The figure was similar across all income groups. This confirms that MFIs are providing mortgages also to households with average and below-average salaries. However, it is reasonable to assume that lower-income households are receiving a smaller loan volume, owing to greater credit constraints. In terms of age breakdown, loans for house purchase were mostly used by younger households.
The information above indicates that the debt-to-income ratio of households increased mainly in low- and medium-income households in 2006. The debt burden increased in most income groups. In lower-income households, it was accompanied by a decline in saving. The debt of these households remains riskier for future consumption. However, the share of the consumption expenditure of lower-income households in total consumption is lower than that of higher-income households.