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I feel wealthy: A major determinant of Portuguese households’ indebtedness?

DOI:10.1007/s00181-018-1602-9
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Francisco Camoes at ISCTE-Instituto Universitário de Lisboa
Francisco Camoes
Sofia Vale at ISCTE-Instituto Universitário de Lisboa
Sofia Vale
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Abstract

This paper examines the response of household debt to households’ perception of house prices using data from the first wave of the Household Finance and Consumption Survey. Whereas the literature has hitherto emphasized the effects of housing wealth on consumption, this study concentrates on the effects on debt accumulation—distinguishing mortgage debt from non-mortgage debt and inspecting over-indebtedness. Different measures of housing wealth are considered, controlling for tenure years. The findings reveal that the effects of housing wealth differ by type of loans and with the measure of housing wealth. Over-indebtedness is driven by the same factors that determine mortgage debt, suggesting a strong association between having outstanding liabilities from the primary residence and the risk of entering into default. Further estimations by different income and wealth classes revealed dissimilar housing wealth effects, with non-mortgage debt tending to rise among lower-income households and over-indebtedness tending to be larger among the wealthier.
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Empirical Economics (2020) 58:1953–1978
https://doi.org/10.1007/s00181-018-1602-9
I feel wealthy: A major determinant of Portuguese
households’ indebtedness?
Francisco Camões1
·Sofia Vale1
Received: 6 June 2017 / Accepted: 18 October 2018 / Published online: 24 November 2018
© Springer-Verlag GmbH Germany, part of Springer Nature 2018
Abstract
This paper examines the response of household debt to households’ perception of house
prices using data from the first wave of the Household Finance and Consumption Sur-
vey. Whereas the literature has hitherto emphasized the effects of housing wealth on
consumption, this study concentrates on the effects on debt accumulation—distin-
guishing mortgage debt from non-mortgage debt and inspecting over-indebtedness.
Different measures of housing wealth are considered, controlling for tenure years.
The findings reveal that the effects of housing wealth differ by type of loans and with
the measure of housing wealth. Over-indebtedness is driven by the same factors that
determine mortgage debt, suggesting a strong association between having outstand-
ing liabilities from the primary residence and the risk of entering into default. Further
estimations by different income and wealth classes revealed dissimilar housing wealth
effects, with non-mortgage debt tending to rise among lower-income households and
over-indebtedness tending to be larger among the wealthier.
Keywords Household finance ·Housing wealth effects ·Debt ·Portugal
JEL Classification C25 ·D14 ·R29
1 Introduction
Until the 2007–2008 global economic crisis, advanced economies went through a
period of increased liquidity and historically low interest rates in which household debt
accumulated faster than the GDP growth rate. Alongside that, while house prices kept
rising steadily to reach alarming levels in several countries, new mortgage contracts
BSofia Vale
sofia.vale@iscte.pt
Francisco Camões
fhcc@iscte.pt
1Department of Economics, ISCTE-IUL, Av. Forças Armadas, 1649-026 Lisbon, Portugal
123
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... Thus, according to the life cycle hypothesis, individuals tend to smooth consumption over their lifetime and, as a result, debt would decrease with age (age). The savings profile over the life cycle would then follow an inverted U-shaped relationship, i.e. during the first years of life, indebtedness would increase, but during retirement, saving would decrease (Camões and Vale, 2020;G omez-Salvador et al., 2011;Yilmazer and DeVaney, 2005). As mentioned, the household heads of our sample are aged 50 or over, so it is expected that they are at a stage in their lives when the relationship between age and indebtedness is less intense. ...
... Moreover, Zhu and Meeks (1994) indicate that better educated households have greater access to financial information on credit, as well as a better understanding of this information. Educational attainment often involves a higher potential income (Camões and Vale, 2020;Gan et al., 2016;Kim and DeVaney, 2001), increasing the household's financial capacity to borrow (Camões and Vale, 2020). Besides, some studies report that people with higher levels of education show more positive attitudes towards card spending (Lin et al., 2019), which leads to higher consumer debt. ...
... Moreover, Zhu and Meeks (1994) indicate that better educated households have greater access to financial information on credit, as well as a better understanding of this information. Educational attainment often involves a higher potential income (Camões and Vale, 2020;Gan et al., 2016;Kim and DeVaney, 2001), increasing the household's financial capacity to borrow (Camões and Vale, 2020). Besides, some studies report that people with higher levels of education show more positive attitudes towards card spending (Lin et al., 2019), which leads to higher consumer debt. ...
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... Lastly, the subjective indicator recommends, that households are placed in a better position to assess their own scale of burden imposed by debt (Betti et al. 2007;Brunetti et al. 2012;Keese 2012;Vale and Camoes 2014;Loke 2016). Households who declare that they are confronted with debt repayment problems are classified as overindebted. ...
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