FI Analysis No. 33: Household debt and resilience

The ability to borrow is beneficial to households in many ways. At the same time, debt can make their consumption more sensitive to unexpected changes in interest rates, income, and house prices. This, in turn, can affect how the economy evolves in a crisis. But measures that lead to lower debt don’t necessarily increase the resilience of all households. To assess the effects of borrower-based measures, it is necessary to also consider households’ balance sheets, in particular their liquid assets.

The FI analysis examines how the sensitivity of household consumption to economic shocks is affected by debt and by an amortisation requirement. Drawing on economic research, we describe how household consumption is affected by higher interest rates, loss of income, falling house prices and revised expectations. In a crisis, several such shocks can interact with each other. Depending on the nature of the crisis, this can either reinforce or weaken the overall impact on households.

Debt makes household consumption more sensitive to certain kinds of economic shocks, but this does not necessarily imply that a measure that leads to lower debt increases resilience. An amortisation requirement effects individual households in different ways, depending on their situation and how they adjust their behaviour. To assess the overall effect on resilience, it is important to also look at households' liquid assets, as these constitute an important buffer for dealing with negative economic shocks.

The analysis indicates that household resilience depends on factors that to a large extent differ between households. Therefore, micro data on household debt, assets and consumption are important inputs when assessing macroeconomic risks linked to household debt and resilience. It is also valuable to measure household expectations regarding mortgage rates and house prices.