Cecilia Skingsley: Household debt under the microscope
Speech by Ms Cecilia Skingsley, Deputy Governor of the Sveriges Riksbank, at SABOs (the
Swedish Association of Public Housing Companies) Finance Day, Stockholm, 8 May 2014.
* * *
I would like to thank Annika Svensson, Marianne Sterner, Jakob Winstrand and Dilan Ölcer for their help in writing
this speech and for their views on earlier versions.
The issue of household indebtedness is currently under discussion in many different
contexts. The Riksbank, for example, has expressed its concern about the development of
household debt and the situation on the mortgage market for several years now.1 The
discussions centre on to what extent the increase in household debt that we have seen for
some time poses a risk to the real economy and to the stability of the financial system, and
on the measures that may be needed to reduce these risks.
However, the statistics available to date have not made it possible to conduct all the
analyses that we would have liked to conduct to get a complete picture of the debt situation.
With the support of the Sveriges Riksbank Act, the Riksbank therefore decided in the
summer of 2013 to collect data on individuals' debts from the eight largest banks in Sweden.
This data provides important pieces of the puzzle regarding household debt.
The analysis of the data shows, for example, that households in general are highly indebted
in relation to their incomes - and this applies above all to low and middle-income earners. It
also applies irrespective of where they live in Sweden and how old the borrowers are. The
analysis also shows that almost four out of ten borrowers do not reduce their debts over time
and that most of those who do reduce them very slowly. This indicates that the information
on household debt that we previously had access to is more generally applicable than we
thought.
A continued increase in indebtedness in the household sector may have serious
consequences for the real economy and for financial stability. I therefore see clear risks with
the Swedish households' debt situation.
Given the results of this analysis, and given that there are vulnerabilities in the Swedish
financial system specifically linked to the banks' mortgage lending, it is of the utmost
importance to prioritise work on preventive measures. We need to reduce the risks relating to
indebtedness and strengthen the resilience of the banks. I think that the Riksbank's analysis
can provide an important contribution to this work.
Although we now have better information about household debt, important pieces of the
puzzle are still missing. The Riksbank's data collection was a first measure and there is no
older, historical information on debts at the household level. And, as many others have said
before me, we do not have any information on household wealth either.
Today, I intend to speak above all about the new results from the analysis of the Riksbank's
data on the debts of individual's and households and explain how these relate to other
studies of household indebtedness. I also want to explain why the results should be viewed
in the light of the vulnerabilities in the Swedish financial system. Let me begin, however, by
saying a few words about why household debt is a cause of concern to the Riksbank at all.
Household debt can threaten sustainable growth
The Riksbank has long pointed out the risks associated with the development of household
debt. When household debt is analysed, the debts are usually placed in relation to something
else. As most households pay their borrowing costs using their current incomes rather than
their assets, the debt ratio, that is debts in relation to disposable incomes, is often used as an
illustrative measure of risk.2
Since 1995, the aggregate household debt ratio, that is total household debt as a percentage
of disposable income, has increased from 90 to 174 per cent, and it is expected to continue
to increase in the years immediately ahead. Although the aggregate debt ratio has grown
somewhat more slowly in recent years, it is still very high in an historical perspective (see
Chart 1).
Chart 1. Aggregate debt ratio
Per cent
190
170
150
130
110
90
70
50
70 79 88 97 06 15
Sources: Statistics Sweden and the Riksbank
This has led to the households becoming increasingly sensitive to shocks such as a loss of
income, falling asset prices or rising interest rates. Our primary concern is not that the
households will cause the banks any major loan losses. As we have pointed out for some
time, our assessment is that this risk is limited. However, such shocks may lead the
households to drastically reduce their consumption, especially in the case of households with
large debts, and this may have an impact on the development of the macroeconomy.3 Falling
consumption may in turn reduce the profitability of Swedish companies and ultimately lead to
increased loan losses from the banks' lending to companies. The risk of such a scenario
occurring in Sweden may also have increased in connection with the dramatic increase in the
total level of indebtedness.4 I would also like to point out the difficulties that many individuals
experience when bad times coincide with high private debts.
An additional factor is that mortgage lending forms an important part of the Swedish banks'
assets, which means that the financial system is sensitive to risks linked with indebtedness.
The banks fund as much as three-quarters of their lending for housing purposes on the
market for covered bonds and access to funding on this market is based on Swedish and
foreign investors being highly confident in the safety of the the underlying assets. If
confidence wanes, funding costs may increase and access to funding may decline. This
would disrupt the functioning of the financial system and thus have a direct negative effect on
financial stability. This means that the Swedish mortgage market is in fact not only a concern
for us here in Sweden but also for many investors around the world.
All in all, this means that shocks of various kinds can lead to the high level of indebtedness in
the household sector causing problems for both the real economy and financial stability. This
may make it more difficult for the Riksbank to perform its tasks. There are therefore good
reasons for the Riksbank to care about household indebtedness.
The analysis to date has been based on limited data
The debate on whether the level of household indebtedness is sustainable or not has to date
been based on partly inadequate data. In recent years, the analysis has largely been based
on aggregate data on the households' assets and liabilities from Statistics Sweden's
quarterly data.5 However, over the last four years it has also been possible to some extent to
base the analysis on the annual mortgage survey conducted by Finansinspektionen, in which
information on randomly-sampled new borrowers and some aggregate data are gathered
from the banks. However, the random samples in the mortgage surveys only cover a limited
period and only refer to new loans. The random samples thus only represent only 1.6 per
cent of the debts of the household sector. Consequently, they do not provide a
comprehensive view of the situation in the loan stock, that is for existing loans. As the
information on the loan stock presented in the surveys is at the aggregate level, it is also not
possible to analyse, for example, the distribution of debt ratios.
In November 2013, the findings of a government inquiry, "Over-indebtedness in a credit
society", were published. The data in the inquiry was partly based on new information from
the Swedish Enforcement Authority and from UC, a credit information agency. However, the
data constituted only a cross-section of the households' debts and thus did not enable an
analysis of how debts had developed.
All in all, this means that existing sources of data do not provide a complete picture of
household debt, and that the discussion of the risks associated with household indebtedness
has so far been based on limited material.
The Riksbank's credit data an important piece of the household-debt puzzle
In order to be able to perform better analyses of household debt at the individual and
household levels, the Riksbank therefore decided in the summer of 2013 to gather credit
information on all of the borrowers of the eight largest banks.6 This information covers all the
loans these borrowers have registered with UC, not just those granted by the eight largest
banks. The amount of data is therefore substantial and the loan volume covers
approximately 80 per cent of household loans from monetary financial institutions and 94 per
cent of all mortgages.7 This should be compared to the random samples in the mortgage
surveys, which cover 1.6 percent of households loans from monetary financial institutions.
The data includes monthly data for a three-year period8 on various types of credit, taxed
earned income after tax, number of co-borrowers, taxation values for detached houses, the
parish in which the borrower is registered and other information. The material contains
information on almost four million indebted adult individuals, which corresponds to 52 per
cent of Sweden's total adult population.9 The individuals in the data can be linked to over
1.8 million households.
On the basis of this material we now have the possibility to conduct an in-depth study of total
household debt and not only of new loans - a possibility that we have never really had
before. Using this individual data, it is also possible to examine how debts are distributed, for
example between different income and age groups and geographically. It also enables us to
follow how debts develop over time and thus also provides some information on the
households' amortisation behaviour. The Riksbank's credit data is therefore an important
piece of the household-debt puzzle.
The Riksbank's credit data confirms our concern
Let me now say something about what our data shows and also in some cases place the
data in relation to other results that have been presented to us in various contexts. It is of
course not my intention to give the impression that other results are incorrect in some way. It
is rather the case that data is used in different ways depending on one's perspective and
focus, and this is reflected in the results. The Riksbank's particular focus is on the risks that
household indebtedness may pose to the real economy and financial stability.
The aggregate debt ratio underestimates debts among borrowers
As I mentioned earlier, the aggregate debt ratio is 174 per cent. However, as this figure is
based on the entire Swedish household sector it also includes individuals who have no debts
but have an income. Now that it is possible, it therefore seems more relevant to examine the
debt ratio for those who actually have debts, that is almost four million Swedes over the age
of 17. If the debt ratio is calculated only for indebted households, the figure arrived at is
263 per cent. If we look at those who have mortgages (which constitute approximately
fourfifths of indebted households) the debt ratio reaches 313 per cent (see Chart 2).
This comparison clearly shows that debt ratios vary depending on which households we
choose to look at, and it also makes clear the extent to which the aggregate debt ratio
underestimates the actual burden of debt for indebted individuals.
Chart 2. Debt ratios for different groups
Per cent
400
350
300
250
200
150
100
500
All, including Only Only New
non-indebted indebted mortgage mortgage
borrowers borrowers
Note. The debt ratio for the group designated "All, including non-indebted" corresponds to the aggregate debt
ratio shown in Chart 1. It is calculated as the household sector's total debts in relation to the sector's total
disposable incomes. The debt ratios for the other three groups are calculated as averages of the individual
households' debt ratios.
Sources: Statistics Sweden, the Riksbank and Finansinspektionen
Not only new borrowers have high debt ratios
Another claim is that high debt ratios are mostly to be found among new mortgage
borrowers. Considering the dramatic price increases on the Swedish housing market in
recent years, this is a completely reasonable claim. The higher housing prices are, the
greater the loan required to finance the purchase of a house or flat. Finansinspektionen's
mortgage survey shows that the debt ratio for new mortgage borrowers averages 370 per
cent, which is a higher debt ratio than for existing mortgage holders. On the other hand, I do
not think that the difference between new mortgage borrowers and those who have owned
their homes for some time is as big as I had perhaps expected. This is because people who
have owned their homes for a while have had the opportunity to reduce their debts. The fact
that the difference is not bigger could indicate that the households reduce their debts at a
relatively slow rate. Let me return to this a little later.
The debt ratio is highest among low and middle-income earners
One conclusion of the government's inquiry "Over-indebtedness in a credit society" is that the
highest debt ratios are to be found among those with the highest incomes. This is the picture
you get if you look at the population as a whole, that is if you also include individuals who
have an income but no debts. This means that the inquiry really shows that low-income
earners do not take loans to the same extent as high-income earners.
If we instead look at debts in relation to incomes only for those individuals who have debts
we get a different picture. The average debt ratio is then higher than 200 per cent in all of the
income groups, and in fact highest in the lower income groups (see Chart 3).
If we look at households instead, which may be reasonable considering that many borrowers
in fact live in a household with more than one income earner and thus share responsibility for
servicing the loan, the picture is till one of high debts in relation to incomes in all of the
income groups. And here too it is clear that the highest debt ratios are mainly to be found
among low and middle-income earners.
Our results thus contradict the picture that it is only those with high incomes that have the
highest debt ratios, that is those who are traditionally regarded as having a higher level of
eduction, a stronger position on the labour market and wealth that they can draw from in
difficult situations.
Chart 3. Debt ratios in different income groups
Per cent
800
700
600
500
400
300
200
1000
1 2 3 4 5 6 7 8 9 10
Income deciles
All households (SOU) Indebted individuals Indebted households
Sources: SOU 2013:78 and the Riksbank
High debt ratios are not only a metropolitan phenomenon
It may also be of interest to look at the geographical distribution. It has often been claimed in
the debate in recent years that debts are mostly a "Stockholm problem". The Riksbank's
credit data shows that the debt ratios for households with mortgages in the three major
metropolitan municipalities are over 400 per cent (see Chart 4). This is a very high figure,
which to a certain extent confirms the picture of a high level of debt in the metropolitan
regions. However, something that surprised me is that the debt ratio in the rest of the
country, that is outside the major metropolitan municipalities, is not that much lower but
actually amounts to 300 per cent.
As the rest of the country includes municipalities close to the major cities, however, it can be
said that this figure exaggerates the debt ratio outside the metropolitan regions. If we instead
look at the county level, the average debt ratios for households with mortgages were 430 per
cent in the County of Stockholm, 324 per cent in the County of Västra Götaland, 352 per cent
in the County of Skåne and 265 per cent in the rest of the country.10
In my world, a debt ratio of 265 per cent is also a high figure. Moreover, more than half of
Sweden's population live in the three major metropolitan counties where the debt ratio is
even higher. I therefore object to the picture of high indebtedness as being only a
metropolitan phenomenon.
Chart 4. Debt ratios for households with mortgages in different municipalities
Per cent
500
450
400
350
300
250
200
150
100
50
0
Stockholm Gothenburg Malmö Others
Source: The Riksbank
Young people are most highly indebted, but older people also have high debt ratios
I would also like to take this opportunity to say something about how the debts are distributed
per age group. It is sometimes claimed that it is mostly younger people that are highly
indebted. This is also confirmed by the Riksbank's credit data. However, we also note that
indebtedness is actually rather high in the older age groups (see Chart 5). In other words it is
not only "young yuppies in central Stockholm" that have large debts but also their
grandparents living in small towns and villages in other parts of the country.
Chart 5. Debt ratios for indebted individuals in different age groups
Per cent
500
400
300
200
100
0
1 (27) 2 (33) 3 (38) 4 (42) 5 (47) 6 (51) 7 (56) 8 (61) 9 (66) 10 (76)
Age deciles (average age within decile)
Source: The Riksbank
Many borrowers do not reduce their debts, and those that do reduce them slowly
Let me now also shed some light on how debts change over time. Between 2012 and 2013,
24 per cent of the individuals with mortgages increased their debts and 16 per cent had
unchanged debts. Just over 60 per cent reduced their debts in the same period (see
Chart 6). For those that reduced their debts in this period, the reduction corresponds to an
average remaining amortisation period of 99 years.
In other words, 40 per cent of the individuals that have mortgages have increasing or
unchanged debts, and those that reduce their debts do so very slowly.
Over the three years for which we have data, the proportion of individuals reducing their
debts has in fact increased and the proportion increasing their debts has decreased. On the
other hand, the increase in the proportion of individuals reducing their debts has been very
small.
All in all, the analysis of the Riksbank's credit data thus shows that debt ratios are fairly
evenly-distributed across income groups. They are also spread throughout the country. The
analysis also shows that debt ratios are high even for older borrowers. Consequently, I would
like to point out that the problems associated with debt seem to be both more extensive and
more comprehensive than we have previously realised.
Chart 6. Change in debt among individuals with mortgages, July 2012-July 2013
Percentages
16%
24%
Increased
0 to 10 years
10 to 30 years
30 to 50 years
24%
10%
>50 years
Unchanged
16%
10%
Source: The Riksbank
The risks associated with household debt should be viewed in the light of
vulnerabilities in the financial system
The risks relating to the development of household debt should be viewed in the light of the
vulnerabilities that exist in the Swedish financial system as a whole. The Riksbank has
pointed this out in its Financial Stability Reports.
The Swedish financial system, of which the major Swedish banks form a substantial part, is
large in relation to the Swedish economy. For example, the assets of the Swedish banks
amount to 400 per cent of GDP. This is a high figure in an international perspective. Events
that lead to problems in the banking sector will, not least because of the size of the sector,
have serious consequences for both the financial system and the real economy.
At the same time, all of the major banks have a large proportion of lending to the Swedish
household sector and are also closely interlinked in that they have similar exposures.
The major Swedish banks fund about half of their operations on the capital markets of which
a substantial part is in foreign currency. In simple terms this means that more than one of
every two krona that are lent to Swedish households is ultimately governed by conditions that
are set by anonymous capital managers in Sweden or elsewhere in the world.
Moreover, approximately half of the banks' funding consists of covered bonds which are
partly held by foreign investors and partly by the other major Swedish banks.
All in all, this means that developments on the mortgage market in Sweden are not only
important to individual banks but also to the banking sector as a whole. If the providers of the
banks' market funding were to lose confidence in the banks, or in the situation on the
mortgage market, the price of funding could increase and access to funding decrease. This
would entail higher interest rates for households and perhaps also for companies, depending
on the ability of the banks to parry such a situation. It is therefore vital that our financial
system is resilient and inspires confidence, and that the development of household debt is
deemed to be sustainable in the long term. We are in a situation in which the development of
debt in Sweden and the Swedish mortgage market are not only matters of importance to us
here in Sweden but also to international investors.
We need measures, and the possibility to follow them up, to ensure a system that is
sustainable in the long term
As I said earlier, the new data means that we have taken several further steps towards
seeing the risks associated with household debt. However, I would like it to make it clear that
there is still a long way to go. We still do not have the entire picture. An important area where
we need more data is the asset side, where we have information on the overall situation in
the household sector but not broken down at the individual and household levels. In order to
be able to follow developments it is of course also important to have long, continually
updated time series.
The analysis of the new data that we now have access to shows, all in all, that households in
general are highly indebted in relation to their incomes, and this applies above all to low and
middle-income earners. It also applies irrespective of where the borrowers live and how old
they are. The analysis also shows that many borrowers do not reduce their debts over time
and that those who do reduce them very slowly.
I find this situation worrying. It is not mainly those with high incomes and those who can be
assumed to have considerable wealth that have the largest debts in relation to their incomes.
To a rather large extent it appears to be those who probably have less financial scope to
manage potential shocks. This poses risks to the development of the real economy, but also
to the stability of the financial system, especially in the light of the vulnerabilities that we see
in the Swedish financial system in general.
I firmly believe that measures are needed in several areas to create long-term sustainability.
This is a question of wide-ranging measures to increase resilience in the financial system,
but also of targeted measures to reduce the risks relating to household debt. It is important
that the discussion does not drag on - measures are needed now. I hope that the basis for
analysis that the Riksbank is now presenting will help those concerned to make good
decisions on the required measures.