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

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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.
... Numerous research studies have focused on the field of household finance and on individuals' attitudes towards risk. A thorough review of the academic literature in this field has identified three main areas of research: one explores the relationship between financial literacy and attitudes towards investment (Campbell, 2006;Hilgert et al., 2003;Muñoz-Murillo et al., 2020); another one focuses on household money management and financial well-being (Antonides et al., 2011;Mitrut and Wolff, 2009;Porter and Garman, 1993); and the third strand analyses the socio-demographic and institutional determinants of attitudes towards economic risk (Baker et al., 2019;Bover et al., 2016;Eckel and Grossman, 2002;Farrar et al., 2019;Greig et al., 2019;Lin et al., 2019;Vale and Camões, 2015;van Rooij et al., 2007). ...
... Regarding the assessment of financial risk, multiple studies have focused on investigating the determinants of household financial risk (Bover et al. 2016;Del-Rio and Young, 2005;Farinha, 2004;Kempson and Atkinson, 2006;Rahman et al. 2020;Vale and Camões, 2015). These studies have mainly analysed the relationship between financial vulnerability, indebtedness and two categories of variables: socio-demographic variables and institutional variables. ...
... Literature o household financial risk has centred in the life cycle hypothesis on how spending varies over a lifetime (Modigliani and Brumberg, 1954;1980). As we have seen in the theoretical discussion, there is abundant literature about the processes of over indebtedness and its relationship with occupation, financial literacy and income (Anderloni and Vandone, 2008;Terraneo, 2018;Vale and Camões, 2015). However, there are few studies about which variables shape greater or lesser risk propensity, and how the banking-financial culture of each territory is shaped. ...
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... There has been growing academic interest in understanding the factors contributing to rural household indebtedness. Broadly, prior literature has documented three categories of determinants of rural household indebtedness: external shocks (Atalay et al. 2020;Faulkner, Murphy, and Scott 2019;Kearns, Major, and Norman 2021), households' socioeconomic conditions (Camões and Vale 2020;Chen, Zeng, and Tam 2024;Kandikuppa 2022), and households' demographic characteristics (Deng and Yu 2021;Kowalski et al. 2023;Reboul, Guérin, and Nordman 2021;Tseng and Hsiao 2022). External shocks like financial market volatility are recognized as the primary determinant of rural household financial vulnerabilities (Chmelíková and Redlichová 2020). ...
... Additionally, evidence suggests that socioeconomic conditions impact households' ability to repay debt, which contributes to rural household debt increase (Kowalski et al. 2023;Sangwan, Nayak, and Samanta 2020). For instance, household over-indebtedness was strongly associated with house ownership in Portugal (Camões and Vale 2020). Moreover, social networks have been shown to help mitigate rural household indebtedness (Chen, Zeng, and Tam 2024). ...
... Fan and Salas Garcia 2018; Martínez-Domínguez and Mora-Rivera 2020; Quintana et al. 2018;Zhu et al. 2020) and household indebtedness (e.g. Atalay et al. 2020;Camões and Vale 2020;Delgado Fuentealba et al. 2021;Parlasca et al. 2022;Tseng and Hsiao 2022), we also include a vector of control variables in our empirical specifications. Specifically, we include variables representing age, sex, education, selfreported health condition, marital status, household size, and dependency ratio to capture household demographic characteristics. ...
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... 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. ...
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