THE IMPACT OF UNSECURED DEBT ON FINANCIAL DISTRESS AMONG BRITISH HOUSEHOLDS. Ana del Río and Garry Young. Documentos de Trabajo N.

Transcription

1 THE IMPACT OF UNSECURED DEBT ON FINANCIAL DISTRESS AMONG BRITISH HOUSEHOLDS 2005 Ana del Río and Garry Young Documenos de Trabajo N.º 0512

2 THE IMPACT OF UNSECURED DEBT ON FINANCIAL DISTRESS AMONG BRITISH HOUSEHOLDS

3 THE IMPACT UNSECURED DEBT ON FINANCIAL DISTRESS AMONG BRITISH HOUSEHOLDS (*) Ana del Río (**) BANCO DE ESPAÑA Garry Young (***) BANK OF ENGLAND (*) Ths paper was largely wren when Ana Del-Ro was on secondmen a he Bank of England. The vews expressed n hs paper are hose of he auhors, and no necessarly hose of he Bank of England or Banco de España. We are graeful for helpful commens o Peer Brerley, wo anonymous referees and parcpans of semnars held a he Bank of England and Banco de España. (**) Banco de España. C/ Alcalá, Madrd, Span. Emal: adelro@bde.es. (***) Fnancal Sably, Bank of England, Threadneedle Sree, London, EC2R 8AH. Emal: garry.young@bankofengland.co.uk. Documenos de Trabajo. N.º

4 The Workng Paper Seres seeks o dssemnae orgnal research n economcs and fnance. All papers have been anonymously refereed. By publshng hese papers, he Banco de España ams o conrbue o economc analyss and, n parcular, o knowledge of he Spansh economy and s nernaonal envronmen. The opnons and analyses n he Workng Paper Seres are he responsbly of he auhors and, herefore, do no necessarly concde wh hose of he Banco de España or he Eurosysem. The Banco de España dssemnaes s man repors and mos of s publcaons va he INTERNET a he followng webse: hp:// Reproducon for educaonal and non-commercal purposes s permed provded ha he source s acknowledged. BANCO DE ESPAÑA, Madrd, 2005 ISSN: (prn) ISSN: (on lne) Depóso legal: Imprena del Banco de España

5 Absrac Ths paper uses evdence from he Brsh Household Panel Survey (BHPS) o examne how audes owards unsecured deb are relaed o household fnances and oher characerscs. An ordered-log model s esmaed for 1995 and 2000 usng a self-repored ndcaor of fnancal dsress as he dependen varable. Ths analyss suggess ha he man facors causng deb problems are he unsecured deb-ncome rao, he level of morgage ncome gearng, he level of fnancal wealh of households, her healh, ehncy and maral saus. Whle he proporon of households reporng deb problems dd no change beween 1995 and 2000, here were mporan shfs among dfferen groups. In parcular, more households n he younges age group repored deb repaymens were a heavy burden n 2000, whle he oppose apples o he oldes age group where a smaller proporon of households han n 1995 repored deb was a heavy burden. These changes can largely be accouned for by he changng economc crcumsances of hese groups raher han an unrelaed shf n audes. In parcular, he ncrease n ndebedness of he young was he man facor accounng for her greaer endency o repor deb problems. Key words: Unsecured deb, Brsh Household Panel Survey, ordered-log. JEL classfcaon: C25, D14, D91

6 Summary Unsecured borrowng by Brsh households, manly n he form of personal loans, overdrafs and cred cards, has grown rapdly over he pas decade or so. Ths has led o wdespread concerns ha many households have aken on more deb han hey can easly afford, wh possble fuure consequences for macroeconomc and fnancal sably. Ths paper examnes survey evdence on he exen o whch households consder unsecured deb o be a burden, usng hs as an ndcaor of fnancal dsress. Is am s o quanfy he level a whch unsecured deb becomes a problem for he ypcal household and wha oher facors affec hs oucome. The paper uses evdence for 1995 and 2000 from he Brsh Household Panel Survey (BHPS), whch snce 1995 has quesoned households abou her audes o unsecured deb. We examne how audes o deb are relaed o survey measures of he amoun of deb ha people have and s affordably. We fnd ha, n general, here s a clear lnk beween he subjecve measure of fnancal dsress and ndcaors of he affordably of deb. Our esmaes sugges ha he man deermnan of deb problems s he unsecured deb o ncome rao. There s no clear pon a whch deb becomes a problem, bu our analyss suggess, for example, ha havng an unsecured deb-ncome rao above 12% (he 70 h percenle of households wh any deb) adds a leas 17 percenage pons o he probably of unsecured deb beng somewha of a burden and 4 percenage pons o he probably of beng a heavy burden, compared o households whou any deb. Neverheless, our esmaes also show a general sofenng n audes owards deb, snce he hgher deb o ncome raos observed n 2000 dd no lead o an ncreasng lkelhood of reporng deb o be somewha or a heavy burden. We arbue hs o he greaer affordably of deb n Oher han he unsecured deb o ncome rao, he mos mporan facors affecng he lkelhood of a household reporng deb o be somewha of a burden n 2000 were he level of morgage ncome gearng, he level of fnancal wealh of he household, her healh, ehncy and maral saus. Havng morgage ncome gearng above 20% of ncome added abou 9 percenage pons o he probably of reporng deb o be somewha of a burden. Beng unemployed was also assocaed wh a hgher probably of reporng deb problems. Whle he proporon of households reporng deb problems dd no change beween 1995 and 2000, here were mporan shfs among dfferen groups. In parcular, more households n he younges age group repored deb repaymens were a heavy burden n 2000, whle he oppose apples o he oldes age group where a smaller proporon of households han n 1995 repored deb was a heavy burden. By ncome group, he man change was a sharp fall n 2000 n he proporon of very low ncome households who repored ha deb was a heavy burden. The paper shows ha hese changes can largely be accouned for by he changng economc crcumsances of dfferen groups raher han an unrelaed shf n audes. The ncrease n he medan deb o ncome rao of he young from jus under 8% n 1995 o a level beween 10% and 14% n 2000 was he man facor accounng for her greaer endency o repor deb problems. Whle any gven level of ndebedness was less problemac n 2000 han 1995, he ncreased quany of unsecured deb aken on by hese groups mean ha hey were more lkely o face problems and be vulnerable o poenal shocks n her ncome and neres raes. Moreover, he evdence suggess ha he lkelhood of reporng deb o be a burden ncreased for households wh hgh deb o ncome raos who also experenced

7 an adverse fnancal shock. Ths suggess ha, whle he greaer ndebedness of Brsh households n 2000 had no rased he perceved burden of deb, some would be more vulnerable o adverse economc shocks should hese occur n he fuure.

8 1 Inroducon Unsecured borrowng by Brsh households, manly n he form of personal loans, overdrafs and cred cards, has been growng very rapdly n recen years. Ths has led o wdespread concerns ha many households have aken on more deb han hey can easly afford, wh possble fuure consequences for macroeconomc and fnancal sably 1. Whle he ousandng aggregae sock of unsecured deb of he household secor s small n relaon o he sock of morgage deb and fnancal asses, he hrea poses o macroeconomc and fnancal sably s lkely o be relaed o how s dsrbued hroughou he populaon. Gven ha beer rsk borrowers are able o consoldae deb no morgages, s possble ha unsecured borrowng s ncreasngly beng used by hose no able o borrow elsewhere because hey have eher exhaused her morgage capacy or are consdered hgh rsk. Of course, hs s no he only possble explanaon of he ncrease n unsecured deb. A more bengn nerpreaon s ha sable macroeconomc condons and ncreased compeon among lenders have encouraged people o ake on more deb whou hs ncreasng he burden mposes on hem. Ths paper examnes survey evdence on he exen o whch households consder unsecured deb o be a burden, usng hs as an ndcaor of fnancal dsress. Is am s o quanfy he level a whch unsecured deb becomes a problem for he ypcal household and wha oher facors affec hs oucome. In general, he paper does no aemp o nvesgae he crcumsances ha have caused hose households whose deb s a burden o ge no ha poson 2. For some, he burden s undersood and wllngly aken on when he deb s naed, whereas for ohers deb only becomes a burden when crcumsances change. The paper uses he BHPS 3, whch snce 1991 has asked broadly he same group of people abou her economc and socal crcumsances. In 1995 and 2000, households and ndvduals were asked abou her unsecured deb and snce 1995 hey have been quesoned abou her audes o. More recen nformaon on he burden of unsecured deb as of Sepember 2004 usng a specally commssoned survey s descrbed n May, Tudela and Young (2004). Taken n solaon, self-repored audnal ndcaors of hs ype are dffcul o nerpre as dfferen people may have dfferen audes o he same economc crcumsances. As such, hey may no be very useful n measurng he objecve economc crcumsances ha people face. Neverheless, self-repored audes are mporan sources of nformaon on he well-beng of households. In hs paper we examne how audes o deb are relaed o survey measures of he amoun of ha people have and s affordably. We fnd ha, n general, here s a clear lnk beween he subjecve measure of fnancal dsress and ndcaors of he affordably of deb. Ths analyss allows us o hghlgh he mos mporan facors n deermnng wheher deb s lkely o be consdered a burden by households. Moreover, we are able o assess how audes have changed n response o he large ncrease n ndebedness of Brsh households beween 1995 and We fnd ha he ncreased deb s no consdered more of a burden n 2000 han was n We arbue hs o he greaer affordably of deb n Recen analyses of hs ssue nclude Kempson e al. (2004). 2. We nvesgae he facors ha deermne he level of unsecured deb n a separae paper [Del-Río and Young (2005)]. 3. The BHPS s managed by he ESRC UK Longudnal Sudes Cenre wh he Insue for Socal and Economc Research a he Unversy of Essex. Dealed nformaon can be found n Brce e al. (2002) avalable a hp:// The BHPS s an annual naonal survey whose sample has remaned broadly represenave of he populaon. The frs wave corresponds o 1991 when 5,500 households and 10,300 ndvduals (aged over 16 years) were ncluded. The sample excludes households locaed norh of he Caledonan Canal n Scoland, and all new samples ncluded n BHPS snce 1997 are no consdered n hs paper snce hey only exend he coverage of some parcular regons and groups of populaon. BANCO DE ESPAÑA 11 DOCUMENTO DE TRABAJO N.º 0512

9 The paper s organsed as follows. Secon 2 provdes a prelmnary analyss of unsecured deb and fnancal dsress for UK households n he BHPS. Secon 3 esmaes he facors deermnng wheher a household wll face fnancal dsress. Secon 4 sudes he role of fnancal surprses n explanng he probably of fnancal dsress. Secon 5 shows he dsrbuon of esmaed probables by age and ncome groups. Secon 6 concludes. BANCO DE ESPAÑA 12 DOCUMENTO DE TRABAJO N.º 0512

10 2 Unsecured deb and fnancal dsress n he BHPS The BHPS consues a unque source of nformaon on he fnancal poson and soco-demographc characerscs of a represenave sample of Brsh famles. In hs paper we focus on he nformaon provdes on he burden of deb and s relaon o he amoun of unsecured deb and he general fnancal poson of each household. We frs look a he dsrbuon of unsecured deb across households and hen analyse s relaonshp o he burden of deb. Informaon on he sock of unsecured deb s avalable from he BHPS for 1995 and 2000 only. Unsecured deb n he BHPS covers fnancal commmens apar from morgages and housng relaed loans. I specfcally excludes cred card and oher blls beng pad off n full n he monh of he nervew. Respondens are shown a card prompng hem abou whch forms of deb nsrumens hey are usng. In 1995, hs card conaned he followng ls of deb nsrumens: hre purchase agreemens, personal loans (from bank, buldng socey or anoher fnancal nsuon), cred cards, caalogue or mal order purchase agreemens, DSS Socal Fund loans, any oher loan from a prvae ndvdual, or anyhng else. Overdrafs and suden loans were added o he ls n Ths change n he ls of unsecured deb nsrumens affecs any analyss aempng o compare responses across he wo waves of he survey. As boh ypes of nsrumen were avalable n 1995, s no clear how respondens wh overdrafs or suden loans would have ncluded hs ype of borrowng n her answers o he survey a ha me whou beng promped 4. For example, hey could have consdered borrowng on overdrafs as a form of personal loan. Bu he change n queson mus leave room for doub ha hs was he case. If borrowng usng hese nsrumens were enrely omed n 1995, bu no 2000, hen a comparson would oversae he ncrease n unsecured household deb. There s some evdence agans hs n ha Redwood and Tudela (2004) fnd ha unsecured deb s more underrepored relave o aggregae fgures n 2000 han n Ths mgh sugges ha he new lsed nsrumens n 2000 were ncluded n oher caegores n Throughou hs analyss we assess he sensvy of esmaes o hs poenal problem by changng he sample n In parcular, he analyss s usually presened boh excludng and ncludng households wh suden loans and overdrafs n In addon, snce full-me sudens are he man holders of suden loans and overdrafs we also ake no consderaon he excluson of hs group from he sample n boh years. A lkely reason for he addon of he suden loan caegory n he 2000 survey s ha loans had by hen become he man form of fnancal suppor for sudens. Up o and ncludng academc year 1997/98, sudens were funded under he sysem whch was nroduced n 1990/91, when non-ncome-assessed suden loans were nroduced o provde exra resources owards lvng expenses and parally o replace grans. The man gran raes were frozen a her 1990/91 values unl 1994/95 when he shf from gran o loan was acceleraed by reducng he level of grans and ncreasng loans. Furher deals on he exen of suden loan fnance are provded by Callender and Wlknson (2003). Ths shf n he suden fnance regme owards loans s also lkely o dsor unsecured deb marke parcpaon and borrowng, especally among ndvduals and her famles who have been sudens durng he new regme. Agan, we ry o avod hs dsoron by varyng he sample o exclude hose affeced. 4. Overdrafs represened nearly 7% of he oal number of deb nsrumens menoned n Suden loans were a less sgnfcan 1% of oal deb nsrumens and would have been less mporan n Noe ha households provde he oal amoun of deb hey owe and he dfferen classes of nsrumens hey use. There s no nformaon on he amoun of deb by nsrumen. Therefore, when excludng households wh overdrafs we are also excludng he deb ha hese borrowers may hold n oher nsrumens. BANCO DE ESPAÑA 13 DOCUMENTO DE TRABAJO N.º 0512

11 Accordng o he BHPS, around 48% of households had a leas one form of unsecured deb n 1995 and 2000 (see Table A). If full-me sudens are excluded from he sample n boh 1995 and 2000, hs parcpaon rae does no change (see las wo columns n Table A) 6. The average amoun of unsecured deb 7 of borrowers doubled over hese fve years. For borrowers, medan unsecured deb was 1,000 per debor household n 1995, and 2,500 n The medan unsecured deb-ncome rao ncreased from 5.5% o 9.0% per debor household. Ths ncrease s sll relavely hgh f borrowers wh overdrafs and suden loans are excluded n 2000 or f full-me sudens are no consdered n boh years. Households n he hghes al of he dsrbuon (above he 90 h percenle) had an unsecured deb-ncome rao of 27.1% n 1995, whle n 2000 hs had ncreased o over 37.2%. Table A: Household unsecured deb and deb-ncome raos n BHPS (1995 and 2000) (a) Excludng full-me sudens Number of households wh no unsecured deb 2,351 2,281 2,281 2,289 2,269 Number of households wh unsecured deb 2,181 2,189 2,110 2,112 2,113 Proporon of households wh unsecured deb Unsecured deb levels, for borrowers only (nomnal values, ) mean 2,145 4,255 4,002 2,121 4, h percenle h percenle h percenle 1,000 2,500 2,200 1,000 2, h percenle 2,500 5,000 5,000 2,500 5, h percenle 6,250 11,000 10,200 6,250 10,800 Unsecured deb-ncome, for borrowers only (%) sample sze 2,180 2,181 1,979 2,112 2,109 mean h percenle h percenle h percenle h percenle h percenle (a) The number of households wh unsecured deb excludes famles whose deb s only n he form of suden loans or overdrafs. Deb and deb-ncome raos are calculaed excludng households wh overdrafs or suden loans, no maer f hey have oher ype of nsrumens. There are sgnfcan dfferences n he proporon of borrowers and average unsecured deb across households accordng o he age of he head of he household (referred o subsequenly as he age of he household) and ncome 9. Around 70% of households aged 16 o 30 years old had a leas one form of unsecured deb n boh 1995 and 2000 (see Table B). Ths fracon decreases wh age o around 15% for households 6. The parcpaon rae s 0.46 f households wh overdrafs and suden loans are excluded. Bu hs fgure s no oally relevan for he comparson snce n 2000 we are excludng households wh oher ypes of nsrumens. A an ndvdual level, 185 ou of 459 ndvduals only hold deb n he form of overdrafs or suden loans. Excludng households wh no deb (apar from ha on overdrafs or suden loans) he proporon of borrowers s 0.48 n If ndvduals canno provde he exac amoun hey owe, hey choose among some nervals. In parcular, hey are asked o ndcae wheher he amoun hey owe s more han 100, more han 500, more han 1,500, or more han 5,000. Dependng on he case we assgn a deb of 50, 300, 1,000, 3,250 or 7,000, o hese cases respecvely. Ths affecs 310 ndvdual borrowers (ou of 6,889). In addon, f deb s a jon commmen we only assgn half of he value. In 2000 whch par of he deb s a sole commmen s known bu we do no use hs nformaon snce s no avalable for Jon commmens affec 984 and 709 ndvduals ou of 3,481 and 3,458 debors n 1995 and 2000 respecvely. Once he deb varable for each ndvdual s bul, a household varable s deermned by addng up he deb of all members. For each year, all unsecured deb values above he 99 h percenle are recoded o he value of he 99 h percenle. Ths s also done for unsecured deb-ncome raos. 8. If borrowers wh overdrafs and suden loans are excluded he medan n 2000 s somewha lower ( 2,200). 9. We use he annual household ncome provded by BHPS scaled by a converson facor akng no accoun he effecs of household sze and composon. Income groups are percenles of he ncome dsrbuon for he oal sample n For 2000 he percenles are updaed usng he Real Prce Index. BANCO DE ESPAÑA 14 DOCUMENTO DE TRABAJO N.º 0512

12 older han 60 years old. Comparng 1995 and 2000, he parcpaon of younger households seems o be larger n 2000, alhough her conrbuon o aggregae deb s relavely small gven her small and declnng wegh n he populaon (see las columns n Table B). Parcpaon n he unsecured deb marke s clearly hgher for households wh ncome above he medan, wh around 60% of hem havng some form of unsecured deb n 1995 and Table B: Proporon of borrowers and sample weghs by age and ncome Proporon of borrowers Excludng full-me sudens Sample weghs of each age and ncome group % Toal sample Exc. new ype of nsrumens (a) age groups Toal ncome groups below he 10 h percenle h -30 h percenle h -50 h percenle h -70 h percenle h -90 h percenle above he 90 h percenle Toal (a) Households wh overdrafs or suden loans and wh no oher ype of unsecured deb are excluded. As Cox e al. (2002) showed, he deb-ncome rao s negavely relaed wh age n boh 1995 and 2000 (see Char 1). Deb-ncome raos ncreased for every age group beween 1995 and The ncrease for he younges s dffcul o quanfy due o he nroducon of new caegores of deb o he quesonnare and he change n mehod of suden fnance. The ncrease s smaller when famles wh eher suden loans or overdrafs are excluded from he analyss 10. For hose younger han 60, deb levels do no vary very much across age, n boh 1995 and Smlar resuls are obaned when full-me sudens are excluded from he sample. BANCO DE ESPAÑA 15 DOCUMENTO DE TRABAJO N.º 0512

13 Char 1: Household unsecured deb and deb-ncome by age (of he head of he household) deb/ncome Unsecured deb-ncome rao (medan) by age (a) Mean unsecured deb (only debors) by age, consan prces (a) (a) Excludng all famles wh suden loans and overdrafs. The deb-ncome rao s sgnfcanly hgher han average for households below he 10 h percenle n he ncome dsrbuon n 1995 and much hgher n 2000 (see Char 2). The apparen change n he deb-ncome rao beween 1995 and 2000 s lkely o be parly due o he change n he BHPS quesonnare and shf n he suden fnance regme. If all households wh suden loans and overdrafs n 2000 are excluded from he comparson, hen he deb-ncome rao for he lowes decle of he dsrbuon acually falls beween 1995 and When full-me sudens are excluded, (Char 3) he ncrease n deb-ncome rao for he lowes decle s smlar o ha of oher ncome groups. The deb-ncome rao n 1995 s slghly ncreasng beween he 10 h and 90 h percenles of he ncome dsrbuon, bu que fla n Usng he same real ncome hresholds, s clear ha he deb-ncome rao ncreased beween 1995 and 2000 for all ncome groups, wh he sharpes ncrease for hose beween he 10 h and 30 h percenles of he ncome dsrbuon. I s neresng o noe, however, ha he wegh of he lowes-ncome group fell consderably durng ha me as real ncome levels ncreased (Table B), he general ncrease n ncome beng relevan n explanng he ncrease n aggregae deb levels. Char 2: Household unsecured-deb and deb-ncome by ncome deb/ncome Unsecured deb-ncome rao (medan) by ncome (a) Mean unsecured deb (only debors) by ncome consan prces (a) (*) below he perc perc perc perc above he 10h perc. 90h perc 0 below he perc perc perc perc above he 10h perc. 90h perc (*) Value excluded for 2000: 0.43 (a) excludng all famles wh suden loans and overdrafs BANCO DE ESPAÑA 16 DOCUMENTO DE TRABAJO N.º 0512

14 Char 3: Household unsecured-deb and deb-ncome by ncome Excludng full-me sudens from he sample deb/ncome Unsecured deb-ncome rao (medan) by ncome Mean unsecured deb (only debors) by ncome consan prces below he 10h perc. perc perc perc perc above he 90h perc 0 below he 10h perc. perc perc perc perc above he 90h perc As noed earler, he BHPS also provdes self-repored nformaon on he exen o whch households consder her deb repaymens o be a burden. They are frs asked wheher anyone n he household has o make repaymens on hre purchases or loans, excludng morgage loans bu ncludng DSS socal fund loans. If he answer s yes 11, hey are hen asked o wha exen s he repaymen of such debs and he neres a fnancal burden on your household? Would you say s a heavy burden, somewha of a burden or no a problem? In boh 1995 and 2000 around 30% of he debor households n he sample repored her unsecured deb repaymens o be somewha a burden, whle a furher 10% hough hem a heavy burden. We use hs nformaon as an ndcaor of fnancal dsress. As shown n Char 4, debors reporng such problems end o have hgher unsecured deb-ncome raos hroughou he household ncome dsrbuon. In addon, mean (and medan) unsecured deb-ncome raos of hose reporng fnancal problems are hgher n 2000 han n The mean unsecured deb-ncome rao of hose reporng deb o be a heavy burden was 16% n 1995 and 26% n Ths may sugges ha households perceved a gven deb-ncome rao o be less burdensome n 2000 han When all he sample s used n 2000, he deb-ncome rao of hose n he lowes ncome decle who consder her deb o be somewha of a problem or no problem s very hgh. Ths s no sgnfcanly reduced f full-me sudens or hose wh overdrafs or suden loans are excluded from he sample (lower panel of Char 4). 11. In boh 1995 and 2000, only 28% of households answered yes. However, n he fnancal secon of he quesonnare, whch s made on an ndvdual bass, around 48% of he sample repored o have a leas one form of unsecured deb. Ths apparen conradcon suggess ha he household responden mgh no be aware of he deb of oher members n he famly. I could also be he case ha dfferen ype of debs are aken under consderaon when answerng boh quesons. Ths s obvously a problem wh survey daa, and he followng analyss has o be made on a reduced sample of household borrowers. BANCO DE ESPAÑA 17 DOCUMENTO DE TRABAJO N.º 0512

15 Char 4: Self-repored ndcaor of fnancal dsress and deb-ncome raos by ncome group 0.70 Mean unsecured deb-ncome rao by ncome group n Mean unsecured deb-ncome rao by ncome group n no problem somewha a burden heavy burden no problem somewha a burden heavy burden below he perc 10- perc30-50 perc 50-10h perc perc above he 90h perc below he 10h perc. perc perc30-50 perc perc above he 90h perc below he 10h perc. Mean unsecured deb-ncome rao by ncome group n 2000 Excludng full-me sudens perc perc30-50 perc no problem somewha a burden heavy burden perc above he 90h perc below he 10h perc. Mean unsecured deb-ncome rao by ncome group n 2000 Excludng famles wh overdrafs or s. loans perc perc30-50 perc no problem somewha a burden heavy burden perc above he 90h perc Char 5 shows smple plos of he proporon of households reporng repaymens o be a burden n dfferen age groups. The proporon of households consderng deb paymens o be somewha of a burden s slghly hgher for younger households, boh n 1995 and The dfference across age groups wdened beween hese years due o a fall n he proporon of households aged over 45 reporng ha deb s somewha of a burden. On he oher hand, households consderng deb a heavy burden were concenraed n he over 30 age groups n By 2000 however, here are no obvous dfferences across age groups excep ha a very low proporon of he oldes households repored deb o be a heavy burden. I appears hen ha hose aged under 30 have become more concerned abou deb, whle hose over 30 have become less concerned. These changes n he perceved burden of deb are lkely o reflec shfs n he amoun of borrowng underaken as well as changes n household crcumsances. The nex secon assesses he relaonshp beween he subjecve burden of deb and s possble deermnans. BANCO DE ESPAÑA 18 DOCUMENTO DE TRABAJO N.º 0512

16 Char 5: Proporon of households under fnancal dsress by age group Deb beng somewha a burden (exc. overdrafs and s. loans) Toal sample Deb beng a heavy burden (exc. overdrafs and s. loans) Toal sample BANCO DE ESPAÑA 19 DOCUMENTO DE TRABAJO N.º 0512

17 3 Relaonshp beween ndebedness and he probably of deb beng a problem In hs secon, we analyse he facors ha deermne wheher households are lkely o repor problems n payng her unsecured deb. To assess hs, and o nerpre he resuls, he analyss s carred ou whn he conex of a heavly smplfed framework ha relaes he self-repored burden of deb o household crcumsances. A smple framework We presume ha households consder her unsecured debs o be a burden f he repaymens force hem eher o ncrease her borrowng or reduce her consumpon below some comforable level. By he household budge consran, s possble o sae smple condons ha are useful n characersng paymen problems. The consran can be wren n smplfed form as: c = y + D ( 1 + r ) D (1) + 1 where c s consumpon, D s he sock of unsecured deb a he begnnng of he perod, y s oal dsposable ncome afer morgage neres paymens and r s he neres rae on unsecured deb. Oher asses and lables are assumed fxed n he shor erm. The amoun of consumpon ha he household can afford whou changng he sock of unsecured deb s y r D. I s assumed ha deb becomes somewha of a problem for household a dae when he amoun of consumpon ha can be afforded whou changng he sock of unsecured deb falls below some comforable level, ĉ and becomes a heavy burden when falls below a less comforable level, ~ c. So, for household, deb s a heavy burden f y r D < ~ c, somewha of a burden f ~ c < y r D < cˆ, and no a problem f ncome ne of unsecured neres paymens s greaer han hs level. Suppose ha hese levels depend on household characerscs as follows: c ˆ = ( 1 δ + ε ) y (2) 1 ~ c = cˆ δ y 2 (3) 1 where y s some measure of he household s normal ncome, ( 1 δ ) s he fracon of normal ncome ha a represenave household would regard as gvng a comforable level 2 of consumpon and δ s he fracon of curren ncome ha would reduce consumpon o such a level ha deb becomes a heavy burden, ε s an ndvdual specfc facor ha may be relaed o age and oher household characerscs such as he number of chldren ha makes he perceved comforable level of consumpon for a parcular household dffer from ha of a represenave household. Le ε = α + u, where α reflecs observable household characerscs deermnng consumpon needs and u s a se of unobservable facors ha deermne a household s aude o deb. These facors, ncludng he mood of he household on he day of he survey, capure he subjecve naure of he survey, ncludng any reporng errors. Re-arrangng hese expressons, any household a dae would sae ha deb s no a problem f Z D 1 y y y y 1 = r + ( 1 δ ) ε + α + u < δ y + y y (4) BANCO DE ESPAÑA 20 DOCUMENTO DE TRABAJO N.º 0512

18 ha s somewha of a burden f 1 D 1 y y y y 1 2 δ < Z = r + ( 1 δ ) ε + α + u < δ + δ y + y y (5) and s a heavy burden f Z D 1 y y y y 1 2 = r + ( 1 δ ) ε + α + u > δ + δ y + y y (6) In hs smplfed form, a household would repor deb problems accordng o he value of a connuous laen varable Z relave o unobserved hresholds ha are common o all households by desgn. The randomness n ndvdual audes o deb s capured n he specfcaon of he laen varable whch s here deermned by ncome gearng, normal ncome relave o curren ncome and ndvdual specfc facors, relaed o observable as well as unobservable characerscs. Ths ype of model can be esmaed n cross-secon usng an ordered-log approach where he parameers o be esmaed are he values of he common hresholds as well as any parameers deermnng he value of he laen varable. The dependen varable s he self-repored ndcaor of fnancal dsress (srfd). Ths varable akes he value 1 when he household repors no problem n meeng deb commmens, 2 when he household repors deb o be somewha of a burden and 3 when deb paymens are a heavy burden. The model we esmae s he followng: Prob[srfd =j] =Prob(kj-1 x+u kj) j=1,2,3 (7) where β x represens he observable deermnans of he laen varable and kj are he cu-off pons wh k0 = -, k1 = δ, k2 = δ + δ, k3=+. The varable u, represenng unobservable dfferences across households n her aude o deb, s assumed o be logscally dsrbued: Prob( u exp( k j β x ) k ) = (8) j 1 + exp( k β x ) j Esmaon In esmang hs model, we nclude as explanaory varables he level of unsecured deb, household ncome, age, employmen saus, morgage ncome gearng, fnancal wealh as well as race, educaon, healh and maral saus ndcaors. The level of unsecured deb s capured by dummy varables reflecng he poson of he household n he unsecured deb-ncome dsrbuon. We use dummy raher han connuous varables so as no o mpose a parcular funconal relaonshp beween he level of he deb-ncome rao and he probably of reporng deb problems 12. Income varables are also ncluded separaely so as no o resrc ncome o affec he reporng of deb problems only hrough he deb-ncome rao: s expeced ha hose wh hgher ncome would be less lkely o consder unsecured deb o be a problem for gven levels of he deb-ncome rao. The job saus of he head of household s ncluded o ake accoun of wheher household ncome s consdered o be dfferen o normal. I mgh be expeced ha he curren ncome of he unemployed s below normal, hereby rasng he lkelhood ha deb s a problem for hem. We also nclude household enancy saus, and spl up morgage borrowers by her morgage-ncome gearng level, expecng ha hose wh hgh secured deb would be more 12. Whle he model oulned above explaned deb problems n erms of he flow of deb neres paymens relave o ncome, daa s only avalable on he sock poson. The sock and flow posons are lkely o be very hghly correlaed whou subsanal varaon across households n effecve neres raes. BANCO DE ESPAÑA 21 DOCUMENTO DE TRABAJO N.º 0512

19 lkely o repor unsecured deb paymen problems. The esmaon also akes accoun of he fnancal wealh of he household. We also consder oher personal characerscs of he head of he household (such as gender, age, race, educaon, maral saus and number of chldren) and sx regonal dummes. The sample ncludes all households wh deb ha provded nformaon for he varables ncluded n he regresson. The pooled esmaon coverng 1995 and 2000 ncludes 1993 households. In he man esmaon, each varable s neraced wh an nercep dummy for 2000 so ha comparsons of all he coeffcens and sascal ess for he sgnfcance of dfferences can be made across he wo years. In addon, he resuls of he pooled esmaon whou hs neracon, excep for he consan erm, are provded. Ths reduces subsanally he number of parameers o be esmaed, bu also mposes he assumpon ha hese are consan across he wo years. The hresholds for all dummy varables excep ha for fnancal wealh are kep a her 1995 real values so ha coeffcens are comparable across he wo years. BANCO DE ESPAÑA 22 DOCUMENTO DE TRABAJO N.º 0512

20 Table C: Ordered log: self-repored ndcaor of fnancal dsress Esmaon wh 2000 year neracons Pooled esmaon No.observaons Ch2 366 ch2(83) 312 ch2(42) Prob>ch Pseudo R Ineracon wh 0.11 log lkelhood year dummy Varable Coeff sd.error Margnal Effec (a) Margnal Effec (b) Coeff sd.error Coeff sd.error Unsecured deb o ncome (by percenle) beween 10 h and 30 h beween 30 h and 50 h beween 50 h and 70 h beween 70 h and 90 h larger han he 90 h Age aged 30 o aged 45 o aged 60 or more Qualfcaon Medum Low Income (by percenle) less han 10 h beween 10 h and 30 h beween 30 h and 50 h beween 70 h and 90 h above he percenle 90 h Job saus Self-employed Unemployed Rered Full-me suden Oher Housng Saus no owner owner, ncome gearng<p beween 25 h and 50 h beween 50 h and 75 h larger han 75 h Fnancal Wealh zero fn.wealh Fn wealh>medan Personal Characerscs poor healh Mnory ehnc Female Dvorced wdow/separaed Tme effecs and cu-off pons year k k Noe: The sample ncludes all households wh posve deb provdng he necessary nformaon for varables ncluded n he regresson. The reference group ncludes he lowes ndebed households, younger han 30, wh hgh qualfcaons, ncome beween percenle 50 h and 70 h, employed, owners wh no morgage and wh posve fnancal wealh bu below he sample medan. Percenles values are calculaed for he oal sample. The regresson ncludes 6 regon dummes and oher demographc varables such as gender, maral saus and number of dependen chldren. Percenles for he deb rao are calculaed for 1995 and hey are, respecvely, 0.5%, 2%, 5.5%, 12% and 28.2%. Income percenles are, respecvely, 6,032, 10,051, 15,531, 22,385, 37,022 n In 2000 hey are updaed wh he RPI. Income gearng percenles are 8%, 13%, 20%, n 1995, and 9%, 13%, 20% n For fnancal wealh medan value corresponds o 2,750 n 1995 and 3,270 n BANCO DE ESPAÑA 23 DOCUMENTO DE TRABAJO N.º 0512

21 Table C lss he esmaed coeffcens β, he cu-off pons k1 and k2 and he margnal effecs. The fnal wo columns are for he pooled esmaon whou neracons (excep for he consan). The margnal effec of each characersc on he probably of deb beng repored o be eher somewha of a problem (column a) or a heavy burden (column b) are presened usng he coeffcens whou he neracon for Ths esmaon was also carred ou excludng full-me sudens and he conclusons were qualavely he same. For he reference group, he probably of reporng deb problems s deermned solely by he esmaed value of he cu-off pons, k1 and k2 (see boom lnes n he able). I s esmaed ha n 1995 he probably of a member of he reference group reporng no problems was 0.80, he probably of reporng ha deb s somewha of a burden was 0.18 and he probably of reporng o be a heavy burden was These dfferences among he reference group n he probably of facng deb problems hghlgh he fac ha even people wh wha appear o be he same economc crcumsances can nerpre hose crcumsances dfferenly. I s reassurng hough ha he majory of people n he reference group would be expeced o be n agreemen on wheher hey faced deb problems or no. The ncluson of a me dummy for 2000 makes possble o es wheher here s any evdence of a sgnfcan change beween 1995 and 2000 n he lkelhood of he reference group reporng fnancal dsress. Ths erm s sgnfcan n he pooled esmaon ha does no allow oher coeffcens o vary across he wo years, suggesng ha here was an easng of fnancal coeffcens across hese wo years. Bu hs declne s no evden once oher neracons are allowed for. Ths suggess ha here was a general declne n he lkelhood of reporng fnancal dsress beween 1995 and 2000, bu ha was more apparen for oher groups han he reference groups. The mos sgnfcan changes pon o here beng less fnancal pressure for hose aged beween 30 and 60, hose whou hgh qualfcaons and hose a he exremes of he ncome dsrbuon. Ths wll be commened on furher below. Unsecured deb-ncome rao There s clear evdence ha he lkelhood of reporng dffcules wh deb s monooncally ncreasng n he unsecured deb-ncome rao 14. Accordng o he margnal effecs, havng an unsecured deb-ncome rao beween 12% (he 70 h percenle) and 27% (he 90 h percenle), raher han below 0.5% as for he reference group, would add 17 percenage pons o he probably of unsecured deb beng somewha of a burden and 4 percenage pons o he probably of beng a heavy burden. Thus, for a household wh characerscs oherwse he same as he reference group, he probably of deb beng repored o be somewha of a burden would be 35% raher han 18%. The probably of beng repored o be a heavy burden would be 7% raher han 3%. For hose oherwse lke he reference group bu havng deb jus above 28% of ncome (he 90 h percenle), he probably of deb beng repored o be a heavy burden would be around 12% and he probably of deb beng repored o be somewha of a burden would be around 45%. The neracon of deb-ncome rao wh a dummy varable for 2000 s no sascally dfferen from zero, suggesng ha he probably of reporng problems s vrually dencal n boh years for hose wh unsecured deb greaer han around 12% of ncome. However, he general ncrease n ndebedness n Bran beween 1995 and 2000 has rased he proporon of households n he hghes deb group from 10% n 1995 o 20% n Whle hs would end o ncrease he 13. Tha s, he probably of no problem for he reference group s gven by exp(1.37)/[1+exp(1.37)]. 14. The fac ha deb problems are generally ncreasng n he deb-ncome rao suggess ha here are no clear hresholds for hs rao whch, once crossed, move a household from one sae o anoher. If hs were he case, he coeffcen on deb-ncome raos below he hreshold would be small and nsgnfcan, only becomng large and sgnfcan for hose above he hreshold. In hs way he probably of facng deb problems would move from close o zero o close o one as he hreshold were crossed. Insead, s lkely ha he level of any such hresholds vary by household. In hs sense he approprae nformaon s he proporon of households of a parcular ype ha would face deb problems wh deb-ncome raos above a parcular hreshold. BANCO DE ESPAÑA 24 DOCUMENTO DE TRABAJO N.º 0512

22 proporon of he populaon reporng some knd of deb problem, hs s beng offse by a lower propensy o have deb problems nduced by oher varables. Income effecs There are a number of ways n whch ncome levels affec he lkelhood of reporng deb problems. Incomes ener ndrecly va he unsecured deb-ncome rao and he morgage ncome gearng erms and also drecly hrough he ncome percenle erms. None of he laer are sgnfcan n he basc specfcaon. Bu here s evdence ha some of he drec ncome effecs were sgnfcan n 2000: an ncome level below he 10 h percenle and above he 90 h percenle reduced he probably of deb beng somewha of a burden (relave o ncome beween he 50 h and 70 h percenles) by 12 and 9 percenage pons, respecvely. In he frs case hs s lkely o be assocaed wh he number of low ncome sudens wh hgh deb ncome raos who do no fnd deb o be a burden. In he second case, suggess ha a gven unsecured deb-ncome rao s less onerous for people wh hgh ncomes. Whle hs effec s plausble and conssen wh he heorecal model, s no clear why was no apparen n Job saus Beng unemployed adds sgnfcanly o deb problems, whle he self-employed, who may requre deb for her busness, fnd deb o be less of a problem han ohers wh smlar characerscs. Boh of hese effecs are less apparen n 2000 han n 1995, bu he change s no sascally sgnfcan. Housng saus and morgage deb Housng saus s expeced o affec he lkelhood of reporng deb problems hrough wo channels. Frs, hose wh morgage deb face an addonal dran on her resources, endng o make more lkely ha hey wll face deb problems. Second, hose who own her own house wll end o be able o borrow on beer erms han hose n rened accommodaon, endng o make less lkely ha hey wll face deb problems. The frs effec seems o be presen n he daa o some exen. The lkelhood of reporng unsecured deb problems s ncreasng n he level of morgage ncome gearng. Havng morgage neres gearng above 20% (he op quarle of he dsrbuon) adds 10 percenage pons o he probably of fndng unsecured deb o be somewha of a burden. On he oher hand hose who are no owners and mgh be payng ren also seem more lkely o consder deb a problem, alhough he resuls are sascally sgnfcan only for he pooled esmaon. Fnancal asses Havng fnancal asses conrbues o a lower probably of reporng deb problems, alhough he effec s no quanavely very large. Havng fnancal asses above he medan of 2,750 and 3,270 n 1995 and 2000, respecvely, reduced he probably of reporng any deb problems by 8 percenage pons. Household characerscs Demographc and oher more permanen household characerscs also affec he lkelhood of reporng deb problems. The reference group conans households headed by hose aged under 30. In 1995, hose beween 30 and 60 were more lkely o repor ha deb was a burden, oher hngs equal. Ths would sugges ha young people had a more relaxed aude o deb han her elders. Ths relave effec s no evden n 2000, suggesng ha audes o deb are no relaed o age for hose under 60. The reducon beween 1995 and 2000 n he propensy o repor deb problems among he over-30s s one of he more BANCO DE ESPAÑA 25 DOCUMENTO DE TRABAJO N.º 0512

23 sgnfcan changes hghlghed by hs analyss. The evdence also suggess ha beng dvorced, non-whe or n poor healh are posvely lnked o he lkelhood of reporng deb problems. Goodness of f An overall measure of he goodness of f of he model s he number of responses ha are correcly classfed accordng o wheher hey repor deb problems or no. We classfy responses accordng o he predced probably ha deb s no a problem for each household. If hs predced probably s greaer han 0.55, hen we classfy he household as no havng a problem, f s beween 0.25 and 0.55 we classfy as havng somewha of a burden and f s less han 0.25 we classfy as havng a heavy burden. The probably hresholds are chosen o mach he overall proporons n he hree caegores of audes o deb. Table D: Goodness of f predced and correcly classfed people wrongly classfed % % oal No problem Somewha a problem Heavy problem Toal Noes: Responses classfed accordng o he predced probably of deb no beng a problem (prno). No problem f prno>0.55, somewha of a problem f 0.55>prno>0.25 and a heavy burden f prno < Table D shows ha 62% of households are classfed correcly on hs bass. Ths vares accordng o he classfcaon. By consrucon, he model classfes abou 60% of households as no reporng a problem. Ths s correc for 75% of hese households, bu 25% of hem clam o have a problem wh deb. A he oher exreme, abou 10% of households are classfed as fndng deb o be a heavy burden. Ths classfcaon s correc for 42% of hese households, bu 58% of hem deny ha deb s such a problem. As would be expeced n a model wh sascally sgnfcan coeffcens, hese classfcaons are subsanally beer han would be obaned f households were classfed randomly. In ha case he proporons correcly classfed would be approxmaely 60%, 30% and 10% for he no a problem, somewha of a burden and heavy burden caegores respecvely. The errors reflec he pon made earler ha even people wh he same observed crcumsances have dfferen audes o deb. The mporan pon s ha he economerc analyss s able o dsngush he economc characerscs of debors ha conrbue o he reporng of deb problems. BANCO DE ESPAÑA 26 DOCUMENTO DE TRABAJO N.º 0512

24 4 Overndebedness and he role of fnancal surprses The sgnfcance of he coeffcens and he sze of he margnal effecs n he precedng esmaon resuls pons o deb-ncome raos as he man varables explanng dfferences among households n he probably of reporng deb repaymen problems. Bu here s lkely o be a dfference beween hose households whose fnancal crcumsances are urnng ou as planned and hose who have faced unpleasan fnancal surprses. To es he role of negave fnancal surprses n causng deb paymen problems, we add o he prevous model a varable ha akes accoun of wheher a household has had an adverse fnancal surprse. Ths varable has prevously been used by Böhem and Taylor (2000) n her sudy of housng paymen problems. I consss of he dfference beween he repored change n he fnancal suaon of a household n a parcular year and he expeced change n he fnancal suaon for he forhcomng year as repored n he prevous year. We assume ha a household has suffered a negave fnancal shock f he expeced change n he fnancal suaon was beer han he acual change repored one year ahead. The varable for fnancal surprses s neraced wh he unsecured deb-ncome rao and we nclude conemporaneous and lagged values. Specfcally, for hose wh deb-ncome raos above he 70 h percenle: hose no affeced by negave fnancal shocks n he pas wo years, hose who experenced a fnancal shock n one year or he oher and hose who experenced a shock n boh years. Because he household needs o be observed n he wo prevous years, he sample s reduced o 838 and 871 households n 1995 and 2000 respecvely. The ncluson of he fnancal surprse varable leads o some modfcaon of he prevous resuls. In parcular here s evdence ha havng a hgh unsecured deb-ncome rao s no suffcen o rase he probably of reporng deb problems for ceran levels for deb. The pooled esmaon shows ha hose wh deb-ncome raos beween he 70 h and 90 h percenles only had a sgnfcanly hgher probably of reporng deb problems f hey had also suffered a negave fnancal surprse n he curren or prevous perod (see Table E). The coeffcens of he oher varables ncluded n he equaon (no shown n Table E) do no show large changes, alhough unemploymen and he dummy varable for households wh he larges morgage ncome gearng reduce her sgnfcance when nroducng negave fnancal shocks. Ths suggess ha hese varables mgh be pckng up he effec of an adverse fnancal shock. When varables are neraced wh he 2000 dummy varable he sandard errors of he esmaon ncrease sgnfcanly and he dfferences beween 1995 and 2000 are no sascally sgnfcan. The mporance of hese resuls s ha hey show ha he lkelhood of reporng deb problems s greaer when hgh deb-ncome raos are combned wh negave fnancal surprses. Ths ndcaes ha unsecured deb rases he vulnerably of households o adverse shocks. BANCO DE ESPAÑA 27 DOCUMENTO DE TRABAJO N.º 0512

25 Table E: Ordered log ncludng fnancal surprses Pool esmaon 2000 year neracon No.observaons ch2(95) Prob>ch Pseudo R Ineracon wh log lkelhood dummy for year 2000 varable Coeff sd.error Coeff sd.error Coeff sd.error unsecured-deb o ncome beween perc. 10h and 30h beween 30 h and 50 h beween 50 h and 70 h beween 70 h and 90 h no neg shock neg surprse (-1) neg surprse neg surprse () and (-1) larger han he perc.90 h no neg shock neg surprse (-1) neg surprse neg surprse () and (-1) BANCO DE ESPAÑA 28 DOCUMENTO DE TRABAJO N.º 0512