The impact of unsecured debt on financial distress among British households

Transcription

1 The mpac of unsecured deb on fnancal dsress among Brsh households Ana Del-Río* and Garr Young** Workng Paper no. 262 * Banco de España. Alcalá, Madrd, Span Emal: adelro@bde.es ** Fnancal Sabl, Bank of England, Threadneedle Sree, London, EC2R 8AH. Emal: garr.oung@bankofengland.co.uk Ths paper was largel 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 necessarl hose of he Bank of England or Banco de España. We are graeful for helpful commens o Peer Brerle, wo anonmous referees and parcpans of semnars held a he Bank of England and Banco de España. Copes of workng papers ma be obaned from Publcaons Group, Bank of England, Threadneedle Sree, London, EC2R 8AH; elephone , fax , emal mapublcaons@bankofengland.co.uk. Workng papers are also avalable a The Bank of England s workng paper seres s exernall refereed. Bank of England 2005 ISSN

2 Conens Absrac 5 Summar 7 1 Inroducon 9 2 Unsecured deb and fnancal dsress n he BHPS 10 3 Relaonshp beween ndebedness and he probabl of deb beng a problem 18 4 Overndebedness and he role of fnancal surprses 25 5 Dsrbuon of esmaed probables b ncome and age groups 27 6 Conclusons 29 References 31 Tables and Chars A: Household unsecured deb and deb-ncome raos n BHPS (1995 and 2000) 12 B: Proporon of borrowers and sample weghs b age and ncome 13 C: Ordered log: self-repored ndcaor of fnancal dsress 21 D: Goodness of f 25 E: Ordered log ncludng fnancal surprses 26 F: Esmaed probables b ncome and age groups 28 1: Household unsecured deb and deb-ncome b age 14 2: Household unsecured deb and deb-ncome b ncome 15 3: Household unsecured deb and deb-ncome b ncome 16 4: Self-repored ndcaor of fnancal dsress and deb-ncome raos b ncome group 17 5: Proporon of households under fnancal dsress b age group 18 3

3 Absrac Ths paper uses evdence from he Brsh Household Panel Surve (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 analss 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, ehnc 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 ounges age group repored deb repamens were a heav 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 heav burden. These changes can largel be accouned for b he changng economc crcumsances of hese groups raher han an unrelaed shf n audes. In parcular, he ncrease n ndebedness of he oung was he man facor accounng for her greaer endenc o repor deb problems. Ke words: Unsecured deb, Brsh Household Panel Surve, ordered-log. JEL classfcaon: C25, D14, D91 5

4 Summar Unsecured borrowng b Brsh households, manl n he form of personal loans, overdrafs and cred cards, has grown rapdl over he pas decade or so. Ths has led o wdespread concerns ha man households have aken on more deb han he can easl afford, wh possble fuure consequences for macroeconomc and fnancal sabl. Ths paper examnes surve 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 quanf he level a whch unsecured deb becomes a problem for he pcal household and wha oher facors affec hs oucome. The paper uses evdence for 1995 and 2000 from he Brsh Household Panel Surve (BHPS), whch snce 1995 has quesoned households abou her audes o unsecured deb. We examne how audes o deb are relaed o surve measures of he amoun of deb ha people have and s affordabl. We fnd ha, n general, here s a clear lnk beween he subjecve measure of fnancal dsress and ndcaors of he affordabl 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 analss suggess, for example, ha havng an unsecured deb-ncome rao above 12% (he 70 h percenle of households wh an deb) adds a leas 17 percenage pons o he probabl of unsecured deb beng somewha of a burden and 4 percenage pons o he probabl of beng a heav burden, compared o households whou an 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 heav burden. We arbue hs o he greaer affordabl 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, ehnc and maral saus. Havng morgage ncome gearng above 20% of ncome added abou 9 percenage pons o he probabl of reporng deb o be somewha of a burden. Beng unemploed was also assocaed wh a hgher probabl 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 ounges age group repored deb repamens were a heav 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 heav burden. B ncome group, he man change was a sharp fall n 2000 n he proporon of ver low ncome households who repored ha deb was a heav burden. The paper shows ha hese changes can largel be accouned for b 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 oung from jus under 8% n 1995 o a level beween 10% and 14% n 2000 was he man facor accounng for her greaer endenc o repor deb problems. 7

5 Whle an gven level of ndebedness was less problemac n 2000 han 1995, he ncreased quan of unsecured deb aken on b hese groups mean ha he were more lkel 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 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

6 1. Inroducon Unsecured borrowng b Brsh households, manl n he form of personal loans, overdrafs and cred cards, has been growng ver rapdl n recen ears. Ths has led o wdespread concerns ha man households have aken on more deb han he can easl afford, wh possble fuure consequences for macroeconomc and fnancal sabl. (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 sabl s lkel 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 ncreasngl beng used b hose no able o borrow elsewhere because he have eher exhaused her morgage capac or are consdered hgh rsk. Of course, hs s no he onl 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 surve 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 quanf he level a whch unsecured deb becomes a problem for he pcal 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 wllngl aken on when he deb s naed, whereas for ohers deb onl becomes a burden when crcumsances change. The paper uses he Brsh Household Panel Surve (BHPS), (3) whch snce 1991 has asked broadl 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 he have been quesoned abou her audes o. More recen nformaon on he burden of unsecured deb as of Sepember 2004 usng a specall commssoned surve s descrbed n Ma, Tudela and Young (2004). (1) Recen analses 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 b he ESRC UK Longudnal Sudes Cenre wh he Insue for Socal and Economc Research a he Unvers of Essex. Dealed nformaon can be found n Brce e al (2002) avalable a hp:// The BHPS s an annual naonal surve whose sample has remaned broadl represenave of he populaon. The frs wave corresponds o 1991 when 5,500 households and 10,300 ndvduals (aged over 16 ears) 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 he onl exend he coverage of some parcular regons and groups of populaon. 9

7 Taken n solaon, self-repored audnal ndcaors of hs pe are dffcul o nerpre as dfferen people ma have dfferen audes o he same economc crcumsances. As such, he ma no be ver 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 surve measures of he amoun of ha people have and s affordabl. We fnd ha, n general, here s a clear lnk beween he subjecve measure of fnancal dsress and ndcaors of he affordabl of deb. Ths analss allows us o hghlgh he mos mporan facors n deermnng wheher deb s lkel o be consdered a burden b 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 affordabl of deb n The paper s organsed as follows. Secon 2 provdes a prelmnar analss 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 probabl of fnancal dsress. Secon 5 shows he dsrbuon of esmaed probables b age and ncome groups. Secon 6 concludes. 2. Unsecured deb and fnancal dsress n he BHPS The BHPS consues a unque source of nformaon on he fnancal poson and socodemographc 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 analse s relaonshp o he burden of deb. Informaon on he sock of unsecured deb s avalable from he BHPS for 1995 and 2000 onl. Unsecured deb n he BHPS covers fnancal commmens apar from morgages and housng relaed loans. I specfcall 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 he are usng. In 1995, hs card conaned he followng ls of deb nsrumens: hre purchase agreemens, personal loans (from bank, buldng soce or anoher fnancal nsuon), cred cards, caalogue or mal order purchase agreemens, DSS Socal Fund loans, an oher loan from a prvae ndvdual, or anhng else. Overdrafs and suden loans were added o he ls n Ths change n he ls of unsecured deb nsrumens affecs an analss aempng o compare responses across he wo waves of he surve. As boh pes of nsrumen were avalable n 10

8 1995, s no clear how respondens wh overdrafs or suden loans would have ncluded hs pe of borrowng n her answers o he surve a ha me whou beng promped. (4) For example, he 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 enrel 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 analss we assess he sensv of esmaes o hs poenal problem b changng he sample n In parcular, he analss s usuall presened boh excludng and ncludng households wh suden loans and overdrafs n (5) 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 ears. A lkel reason for he addon of he suden loan caegor n he 2000 surve s ha loans had b hen become he man form of fnancal suppor for sudens. Up o and ncludng academc ear 1997/98, sudens were funded under he ssem whch was nroduced n 1990/91, when non-ncome-assessed suden loans were nroduced o provde exra resources owards lvng expenses and parall 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 b reducng he level of grans and ncreasng loans. Furher deals on he exen of suden loan fnance are provded b Callender and Wlknson (2003). Ths shf n he suden fnance regme owards loans s also lkel o dsor unsecured deb marke parcpaon and borrowng, especall among ndvduals and her famles who have been sudens durng he new regme. Agan, we r o avod hs dsoron b varng he sample o exclude hose affeced. 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 (4) Overdrafs represened nearl 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 (5) Noe ha households provde he oal amoun of deb he owe and he dfferen classes of nsrumens he use. There s no nformaon on he amoun of deb b nsrumen. Therefore, when excludng households wh overdrafs we are also excludng he deb ha hese borrowers ma hold n oher nsrumens. (6) The parcpaon rae s 0.46 f households wh overdrafs and suden loans are excluded. Bu hs fgure s no oall relevan for he comparson snce n 2000 we are excludng households wh oher pes of nsrumens. A an ndvdual level, 185 ou of 459 ndvduals onl 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

9 amoun of unsecured deb (7) of borrowers doubled over hese fve ears. For borrowers, medan unsecured deb was 1,000 per debor household n 1995, and 2,500 n (8) The medan unsecured deb-ncome rao ncreased from 5.5% o 9.0% per debor household. Ths ncrease s sll relavel hgh f borrowers wh overdrafs and suden loans are excluded n 2000 or f fullme sudens are no consdered n boh ears. 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 onl (nomnal values, ) mean 2,145 4,255 4,002 2,121 4,177 Unsecured deb-ncome, for borrowers onl (%) 10 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 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 onl 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 he have oher pe of nsrumens. (7) If ndvduals canno provde he exac amoun he owe, he choose among some nervals. In parcular, he are asked o ndcae wheher he amoun he 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 respecvel. Ths affecs 310 ndvdual borrowers (ou of 6,889). In addon, f deb s a jon commmen we onl 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 respecvel. Once he deb varable for each ndvdual s bul, a household varable s deermned b addng up he deb of all members. For each ear, 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). 12

10 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 subsequenl as he age of he household) and ncome. (9) Around 70% of households aged 16 o 30 ears 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 older han 60 ears old. Comparng 1995 and 2000, he parcpaon of ounger households seems o be larger n 2000, alhough her conrbuon o aggregae deb s relavel small gven her small and declnng wegh n he populaon (see las columns n Table B). Parcpaon n he unsecured deb marke s clearl 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 b age and ncome Proporon of borrowers Excludng full-me sudens Sample weghs of each age and ncome group % Toal sample Exc. new pe 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 pe of unsecured deb are excluded. (9) We use he annual household ncome provded b BHPS scaled b 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. 13

11 As Cox e al (2002) showed, he deb-ncome rao s negavel relaed wh age n boh 1995 and 2000 (see Char 1). Deb-ncome raos ncreased for ever age group beween 1995 and The ncrease for he ounges s dffcul o quanf 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 analss. (10) For hose ounger han 60, deb levels do no var ver much across age, n boh 1995 and Char 1: Household unsecured deb and deb-ncome b age (of he head of he household) deb/ncome Unsecured deb-ncome rao (medan) b age (a) Mean unsecured deb (onl debors) b age, consan prces (a) (a) Excludng all famles wh suden loans and overdrafs. The deb-ncome rao s sgnfcanl 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 lkel o be parl 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 acuall 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 slghl 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 (10) Smlar resuls are obaned when full-me sudens are excluded from he sample. 14

12 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 consderabl 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 b ncome deb/ncome Unsecured deb-ncome rao (medan) b ncome (a) Mean unsecured deb (onl debors) b ncome consan prces (a) * 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 (*) Value excluded for 2000: (a) Excludng all famles wh suden loans and overdrafs. 15

13 Char 3: Household unsecured-deb and deb-ncome b ncome Excludng full-me sudens from he sample deb/ncome Unsecured deb-ncome rao (medan) b ncome Mean unsecured deb (onl debors) b 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 repamens o be a burden. The are frs asked wheher anone n he household has o make repamens on hre purchases or loans, excludng morgage loans bu ncludng DSS socal fund loans. If he answer s es, (11) he are hen asked o wha exen s he repamen of such debs and he neres a fnancal burden on our household? Would ou sa s a heav 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 repamens o be somewha a burden, whle a furher 10% hough hem a heav 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 heav burden was 16% n 1995 and 26% n Ths ma 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 (11) In boh 1995 and 2000, onl 28% of households answered es. 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 faml. I could also be he case ha dfferen pe of debs are aken under consderaon when answerng boh quesons. Ths s obvousl a problem wh surve daa, and he followng analss has o be made on a reduced sample of household borrowers. 16

14 problem s ver hgh. Ths s no sgnfcanl reduced f full-me sudens or hose wh overdrafs or suden loans are excluded from he sample (lower panel of Char 4). Char 4: Self-repored ndcaor of fnancal dsress and deb-ncome raos b ncome group 0.70 Mean unsecured deb-ncome rao b ncome group n Mean unsecured deb-ncome rao b ncome group n no problem somewha a burden heav burden no problem somewha a burden heav burden below he 10h perc. perc perc30-50 perc perc above he 90h perc below he 10h perc. perc perc30-50 perc perc above he 90h perc Mean unsecured deb-ncome rao b ncome group n 2000 Excludng full-me sudens no problem somewha a burden heav burden Mean unsecured deb-ncome rao b ncome group n 2000 Excludng famles wh overdrafs or s. loans no problem somewha a burden heav burden below he 10h perc. perc perc30-50 perc perc above he 90h perc below he 10h perc. perc perc30-50 perc perc above he 90h perc Char 5 shows smple plos of he proporon of households reporng repamens o be a burden n dfferen age groups. The proporon of households consderng deb pamens o be somewha of a burden s slghl hgher for ounger households, boh n 1995 and The dfference across age groups wdened beween hese ears 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 heav burden were concenraed n he over 30 age groups n B 2000 however, here are no obvous dfferences across age groups excep ha a ver low proporon of he oldes 17

15 households repored deb o be a heav burden. I appears hen ha hose aged under 30 have become more concerned abou deb, whle hose over 30 have become less concerned. Char 5: Proporon of households under fnancal dsress b age group Deb beng somewha a burden (exc. overdrafs and s. loans) Toal sample Deb beng a heav burden (exc. overdrafs and s. loans) Toal sample These changes n he perceved burden of deb are lkel 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. 3. Relaonshp beween ndebedness and he probabl of deb beng a problem In hs secon, we analse he facors ha deermne wheher households are lkel o repor problems n pang her unsecured deb. To assess hs, and o nerpre he resuls, he analss s carred ou whn he conex of a heavl 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 repamens force hem eher o ncrease her borrowng or reduce her consumpon below some comforable level. B he household budge consran, s possble o sae smple condons ha are useful n characersng pamen problems. The consran can be wren n smplfed form as: c = + D + r ) D (1) 1 (1 + where c s consumpon, D s he sock of unsecured deb a he begnnng of he perod, s oal dsposable ncome afer morgage neres pamens 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 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 heav burden when falls below a less 18

16 19 comforable level, c ~. So, for household, deb s a heav burden f < D r c ~, somewha of a burden f c D r c ˆ ~ < <, and no a problem f ncome ne of unsecured neres pamens s greaer han hs level. Suppose ha hese levels depend on household characerscs as follows: c ) (1 ˆ 1 δ + ε = (2) c c 2 ˆ ~ δ = (3) where s some measure of he household s normal ncome, ) (1 1 δ s he fracon of normal ncome ha a represenave household would regard as gvng a comforable level of consumpon and 2 δ s he fracon of curren ncome ha would reduce consumpon o such a level ha deb becomes a heav burden, ε s an ndvdual specfc facor ha ma 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 u + = α ε, 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 da of he surve, capure he subjecve naure of he surve, ncludng an reporng errors. Re-arrangng hese expressons, an household a dae would sae ha deb s no a problem f 1 1 ) 1 ( u D r Z δ α ε δ < = (4) ha s somewha of a burden f ) 1 ( u D r Z δ δ α ε δ δ + < = < (5) and s a heav burden f ) 1 ( u D r Z δ δ α ε δ + > =. (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 b desgn. The randomness n ndvdual audes o deb s capured n he specfcaon of he laen varable whch s here deermned b ncome gearng, normal ncome relave o curren ncome and ndvdual specfc facors, relaed o observable as well as unobservable characerscs. Ths pe 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 an 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

17 problem n meeng deb commmens, 2 when he household repors deb o be somewha of a burden and 3 when deb pamens are a heav burden. The model we esmae s he followng: Prob[srfd =j] =Prob(k j-1 β x +u k j ) j=1,2,3 (7) where β x represens he observable deermnans of he laen varable and k j are he cu-off pons wh k 0 =-, k 1 = δ, k 2 = δ + δ, k 3 =+. The varable u, represenng unobservable dfferences across households n her aude o deb, s assumed o be logscall dsrbued: Prob( u exp( k j β x ) k j ) = (8) 1+ exp( k β x ) j Esmaon In esmang hs model, we nclude as explanaor varables he level of unsecured deb, household ncome, age, emplomen saus, morgage ncome gearng, fnancal wealh as well as race, educaon, healh and maral saus ndcaors. The level of unsecured deb s capured b dumm varables reflecng he poson of he household n he unsecured deb-ncome dsrbuon. We use dumm raher han connuous varables so as no o mpose a parcular funconal relaonshp beween he level of he deb-ncome rao and he probabl of reporng deb problems. (12) Income varables are also ncluded separael so as no o resrc ncome o affec he reporng of deb problems onl hrough he deb-ncome rao: s expeced ha hose wh hgher ncome would be less lkel 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 unemploed s below normal, hereb rasng he lkelhood ha deb s a problem for hem. We also nclude household enanc saus, and spl up morgage borrowers b her morgagencome gearng level, expecng ha hose wh hgh secured deb would be more lkel o repor unsecured deb pamen 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 dumm for 2000 so ha comparsons of all he coeffcens and sascal ess for he sgnfcance of dfferences can be (12) Whle he model oulned above explaned deb problems n erms of he flow of deb neres pamens relave o ncome, daa s onl avalable on he sock poson. The sock and flow posons are lkel o be ver hghl correlaed whou subsanal varaon across households n effecve neres raes. 20

18 made across he wo ears. In addon, he resuls of he pooled esmaon whou hs neracon, excep for he consan erm, are provded. Ths reduces subsanall he number of parameers o be esmaed, bu also mposes he assumpon ha hese are consan across he wo ears. The hresholds for all dumm varables excep ha for fnancal wealh are kep a her 1995 real values so ha coeffcens are comparable across he wo ears. Table C: Ordered log: self-repored ndcaor of fnancal dsress Esmaon wh 2000 ear neracons Pooled esmaon No.observaons Ch2 366 ch2(83) 312 ch2(42) Prob>ch Pseudo R Ineracon wh 0.11 log lkelhood ear dumm Varable Coeff sd.error Margnal Effec (a) Margnal Effec (b) Coeff sd.error Coeff sd.error Unsecured deb o ncome (b 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 (b 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-emploed Unemploed 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 Mnor ehnc Female Dvorced wdow/separaed Tme effecs and cu-off pons ear k k Noe: The sample ncludes all households wh posve deb provdng he necessar nformaon for varables ncluded n he regresson. The reference group ncludes he lowes ndebed households, ounger han 30, wh hgh quealfcaons, ncome beween percenle 50 h and 70 h, emploed, 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 he are, respecvel, 0.5%, 2%, 5.5%, 12% and 28.2%. Income percenles are, respecvel, 6,032, 10,051, 15,531, 22,385, 37,022 n In 2000 he 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

19 Table C lss he esmaed coeffcens β, he cu-off pons k 1 and k 2 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 probabl of deb beng repored o be eher somewha of a problem (column a) or a heav 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 qualavel he same. For he reference group, he probabl of reporng deb problems s deermned solel b he esmaed value of he cu-off pons, k 1 and k 2 (see boom lnes n he able). I s esmaed ha n 1995 he probabl of a member of he reference group reporng no problems was 0.80, he probabl of reporng ha deb s somewha of a burden was 0.18 and he probabl of reporng o be a heav burden was (13) These dfferences among he reference group n he probabl of facng deb problems hghlgh he fac ha even people wh wha appear o be he same economc crcumsances can nerpre hose crcumsances dfferenl. I s reassurng hough ha he major of people n he reference group would be expeced o be n agreemen on wheher he faced deb problems or no. The ncluson of a me dumm for 2000 makes possble o es wheher here s an 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 var across he wo ears, suggesng ha here was an easng of fnancal coeffcens across hese wo ears. 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 monooncall 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 probabl of unsecured deb beng somewha of a burden and 4 percenage pons o he (13) Tha s, he probabl of no problem for he reference group s gven b exp(1.37)/(1+exp(1.37)). (14) The fac ha deb problems are generall 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, onl becomng large and sgnfcan for hose above he hreshold. In hs wa he probabl of facng deb problems would move from close o zero o close o one as he hreshold were crossed. Insead, s lkel ha he level of an such hresholds var b household. In hs sense he approprae nformaon s he proporon of households of a parcular pe ha would face deb problems wh deb-ncome raos above a parcular hreshold. 22

20 probabl of beng a heav burden. Thus, for a household wh characerscs oherwse he same as he reference group, he probabl of deb beng repored o be somewha of a burden would be 35% raher han 18%. The probabl of beng repored o be a heav 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 probabl of deb beng repored o be a heav burden would be around 12% and he probabl of deb beng repored o be somewha of a burden would be around 45%. The neracon of deb-ncome rao wh a dumm varable for 2000 s no sascall dfferen from zero, suggesng ha he probabl of reporng problems s vruall dencal n boh ears 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 proporon of he populaon reporng some knd of deb problem, hs s beng offse b a lower propens o have deb problems nduced b oher varables. Income effecs There are a number of was n whch ncome levels affec he lkelhood of reporng deb problems. Incomes ener ndrecl va he unsecured deb-ncome rao and he morgage ncome gearng erms and also drecl 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 probabl of deb beng somewha of a burden (relave o ncome beween he 50 h and 70 h percenles) b 12 and 9 percenage pons, respecvel. In he frs case hs s lkel 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 wh was no apparen n Job saus Beng unemploed adds sgnfcanl o deb problems, whle he self-emploed, who ma 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 sascall 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 lkel ha he 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 lkel ha he 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 probabl of fndng unsecured deb o be somewha of a burden. On he oher hand hose who are no owners and mgh be pang ren also 23

21 seem more lkel o consder deb a problem, alhough he resuls are sascall sgnfcan onl for he pooled esmaon. Fnancal asses Havng fnancal asses conrbues o a lower probabl of reporng deb problems, alhough he effec s no quanavel ver large. Havng fnancal asses above he medan of 2,750 and 3,270 n 1995 and 2000, respecvel, reduced he probabl of reporng an deb problems b 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 b hose aged under 30. In 1995, hose beween 30 and 60 were more lkel o repor ha deb was a burden, oher hngs equal. Ths would sugges ha oung 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 propens o repor deb problems among he over-30s s one of he more sgnfcan changes hghlghed b hs analss. The evdence also suggess ha beng dvorced, non-whe or n poor healh are posvel 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 correcl classfed accordng o wheher he repor deb problems or no. We classf responses accordng o he predced probabl ha deb s no a problem for each household. If hs predced probabl s greaer han 0.55, hen we classf he household as no havng a problem, f s beween 0.25 and 0.55 we classf as havng somewha of a burden and f s less han 0.25 we classf as havng a heav burden. The probabl hresholds are chosen o mach he overall proporons n he hree caegores of audes o deb. Table D: Goodness of f predced and correcl people wrongl classfed classfed % % oal no problem somewha a problem heav problem Toal Noes: Responses classfed accordng o he predced probabl 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 heav burden f prno <

22 Table D shows ha 62% of households are classfed correcl on hs bass. Ths vares accordng o he classfcaon. B 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 heav burden. Ths classfcaon s correc for 42% of hese households, bu 58% of hem den ha deb s such a problem. As would be expeced n a model wh sascall sgnfcan coeffcens, hese classfcaons are subsanall beer han would be obaned f households were classfed randoml. In ha case he proporons correcl classfed would be approxmael 60%, 30% and 10% for he no a problem, somewha of a burden and heav burden caegores respecvel. 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 analss s able o dsngush he economc characerscs of debors ha conrbue o he reporng of deb problems. 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 probabl of reporng deb repamen problems. Bu here s lkel 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 pamen 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 prevousl been used b Böhem and Talor (2000) n her sud of housng pamen problems. I consss of he dfference beween he repored change n he fnancal suaon of a household n a parcular ear and he expeced change n he fnancal suaon for he forhcomng ear as repored n he prevous ear. 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 ear ahead. The varable for fnancal surprses s neraced wh he unsecured deb-ncome rao and we nclude conemporaneous and lagged values. Specfcall, for hose wh deb-ncome raos above he 70 h percenle: hose no affeced b negave fnancal shocks n he pas wo ears, hose who experenced a fnancal shock n one ear or he oher and hose who experenced a shock n boh ears. Because he household needs o be observed n he wo prevous ears, he sample s reduced o 838 and 871 households n 1995 and 2000 respecvel. 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 probabl 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 onl had a sgnfcanl hgher probabl of reporng deb problems f he 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 unemplomen and he dumm varable for households wh he larges morgage ncome gearng 25

23 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 dumm varable he sandard errors of he esmaon ncrease sgnfcanl and he dfferences beween 1995 and 2000 are no sascall sgnfcan. The mporance of hese resuls s ha he 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 vulnerabl of households o adverse shocks. Table E: Ordered log ncludng fnancal surprses Esmaon wh 2000 ear neracon Pooled esmaon No.observaons ch2(95) 359 ch2(47) 302 Prob>ch Pseudo R Ineracon wh 0.12 log lkelhood dumm for ear 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) Dsrbuon of esmaed probables b ncome and age groups The esmaed relaonshps descrbed above show he nfluence of dfferen facors on he lkelhood of reporng deb problems and how he have changed over me. In hs secon we look a he probabl of deb problems beng repored for dfferen groups of households, akng accoun of her dfferen crcumsances bu no allowng for unobserved ndvdual effecs. B srppng ou he ndvdual effecs, s possble o show on a sandardsed bass where n he populaon deb problems are mos lkel o be repored. Table F shows mean predced probables of reporng deb problems b age and ncome group akng accoun of he acual crcumsances of hose n each group. In general, deb problems are mos lkel o be repored among households headed b ear olds owards he lower end of he ncome dsrbuon. In boh 1995 and 2000 households headed b ear olds wh ncome beween he 10 h and 30 h percenles of he ncome dsrbuon had a 45% chance of reporng ha unsecured deb was somewha of a burden and over a 20% chance ha he would consder a heav burden. Whle he lkelhood of reporng deb problems s smaller a hgher 26