Developments in household debt. An analysis of microdata for the period 1986-2003.

Author:Riiser, Magdalena D.

Household debt in Norway has increased substantially since the 1980s. This article uses microdata to describe developments in household debt, income and financial assets from 1986 to 2003. Our findings show that an increase in average debt, the number of households and the share of indebted households has contributed to the increase in debt since 1986. Most households have a moderate or low debt-to-income ratio. Debt among households with a high debt-to-income ratio was reduced as a percentage of total debt after the banking crisis in 1988-1992, but these developments have been reversed since 1998. This primarily reflects strong debt growth among young households. Our analysis shows that financial assets have primarily increased in households without debt or with a low debt-to-income ratio. The accumulation of financial wealth can therefore only to a limited extent be regarded as a buffer against increases in interest expenses.

1 Introduction

As in other countries, household debt in Norway has grown rapidly in the past few years and at a faster pace than household income. (2) This is related to developments in house prices. (3) Debt growth has resulted in an increase in the household debt burden (debt as a percentage of disposable income), which now exceeds the level prevailing at the end of the 1980s. In the same period, however, household financial assets have increased substantially. From a macroeconomic perspective, Norwegian households' financial position is still strong. However, a macroeconomic approach is not always the best way of identifying financial vulnerability, primarily because it does not take differences between the various types of households into account. Even though the situation seems sound at the aggregated level, some groups of households may be particularly exposed to disturbances to the economy. Analyses of microdata for households are therefore a supplement to the macroeconomic analysis. Since the mid-1990s, Norges Bank has employed micro-level data from Statistics Norway's Income and Property Statistics for Households in its analyses of the household sector. Since Norges Bank now has direct access to the underlying data, more specialised analyses can be conducted. Using the micro-level data as a basis, this article examines developments in household debt, income and assets from 1986 to 2003. This period includes the liberalisation of the credit market in the 1980s and disturbances such as the banking crisis in 1988-1992. It will therefore be possible to observe whether and how the structural changes that have occurred have affected household debt.

This article is organised as follows: Section 2 provides a brief overview of the underlying data. Section 3 deals with the shares of indebted households, while Section 4 analyses the effects on debt of demographic conditions and other factors. Section 5 focuses on skews in the distribution of household debt, income and assets. Debt and financial assets for groups of households, defined according to income, age and debt-to-income ratio, have been analysed to estimate each group's share of total debt and financial assets. Section 6 summarises our findings.

2 Underlying data

Income and property statistics for the period 1986-2003 provide information on households' average income, income composition and distribution, and similar information about financial assets. The statistics are mainly based on figures from the income and property distribution surveys, which are surveys of representative samples of households. Income and property information is based on tax returns for all members in the selected households in addition to information on tax-free income from a number of public registers.

Up to 1990, about 5000 households were included in the survey. The sample has been expanded since then. In 2003, which is the latest year for which figures are available, the sample comprises approximately 17 000 households. Because of the relatively low number of observations in the late 1980s, interpretation of the data in this period is more uncertain. Several definitions in the underlying data have been changed in the analysis period. The analysis in this article has been conducted using figures prepared by Statistics Norway to ensure that the time series are as consistent as possible throughout the period to 2003.

In the article, household debt is defined as total debt recorded in the tax return statistics. It includes both mortgage debt and non-mortgage debt. The term income refers to disposable income. It is calculated as income excluding tax and interest expenses, but including housing income. When ranking households by income, however, we use deciles for income after tax. (4) In our calculation of the debt-to-income ratio (debt burden), households without income or with negative income are excluded. With zero income, the debt burden is not defined. In addition, some households may be recorded with negative income because of various tax deductions. This applies in particular to the self-employed. Since negative income has little relevance in our analysis, these households have been excluded from the data in some contexts. In the calculation of average debt by age, extreme observations (households with a debt burden of more than 20 000 per cent) have been removed. These households only account for a small share of households and total debt, but would have had a considerable impact on the average figures. Figures for financial assets are taken directly from tax return statistics. This does not include group insurance claims, however. For a complete definition of the concepts in the income and property statistics, see Statistics Norway (2004).

3 Share of indebted households

In macroeconomic analyses of the household debt situation, total household debt is usually assessed against total household income. However, this method overlooks differences between households with debt and households without debt, and may result in underestimation of financial institutions' credit risk (5). Micro-level figures, on the other hand, enable us to distinguish between the two groups. According to the income and property statistics, 80 per cent of Norwegian households were indebted in 2003. This is a high percentage compared with other European countries. Chart 1 shows the share of mortgage-indebted households and the share with non-housing debt in a number of European countries. (6) National figures, with the exception of figures for Norway, have not been adjusted for households with both mortgage debt and non-housing debt and are therefore overestimated to a certain extent. The high share of indebted households in Norway may be related to the high...

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