Sunday, November 21, 2010

The interest cost of household debt

We have been considering the household sector in recent weeks.  We look at the aggregates from the household sector accounts, the use of the €11 billion saved in 2009 and the components of the €84 billion of private consumption expenditure.

One further issue to consider is the role of debt and interest in the household account.  Interest form parts of “property income” which was part of the table produced with the first post linked above.  Household debt is a feature of the capital account which we have not yet considered.

Interest expenditure does not form part of private consumption expenditure.  The graph below shows household interest outgoings since 2002 while a comparison of this to interest earned can be seen here


After rising to a peak of €8.1 billion in 2008, the household interest bill fell to €4.0 billion in 2009.  This is likely because of the fall in the ECB base rate which was raised to 4.25% in July 2008 but had plunged to 1.00% by May 2009.

There  was also a decrease in the amount of debt on which this interest was accruing.  According the Central Bank data outstanding household loans in December 2007 was €153.0 billion.  By December 2008 this had fallen to €144.6 billion with a further fall to €140.1 billion by December 2009.  This €140 billion in debt was made up of €110 billion of loans for house purchase, €24 billion of consumer credit and €6 billion of other loans.

The household sector capital account for the period 2006-09 is shown below the fold

Household Capital Accounts

It can be seen that 2009 was the first year in which the household sector was not a net borrower (and this is actually the case since this series began in 2002).  This is was driven by the surge in savings to €11 billion and the collapse in capital formation (house purchases).

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