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This article reports findings on the current state of households’ balance sheets. It reports that while household debt is still high there has been a modest improvement in mortgagors’ balance sheet positions over the past year. For instance, the share of mortgagors with high debt servicing ratios has fallen and is now close to a historic low. And both mortgagors and renter households consider unsecured debt repayments to be less of a burden than a year ago. Using the survey responses, the article assesses how households might respond to a hypothetical 2 percentage rise in interest rates. It finds that were interest rates to rise by 2% immediately, with no change in household incomes, “an estimated 31% of mortgagors would need to take some kind of action… down from 37% in 2014 and 44% in 2013.”
This implies that while higher interest rates would increase the financial pressure on some households, they are in general “in a slightly better position to cope with an increase in interest rates than they were a year ago”.
The survey also looks at the potential impact on household spending of the continued fiscal consolidation.
The survey responses, collected in September, suggest that the consolidation is “likely to continue to weigh on household spending” and that “there are some households who may be vulnerable to higher interest rates and who expect to be more heavily affected than average by further fiscal consolidation”.
The survey results suggest that the fiscal consolidation is an important factor that has weighed on household spending, and it is likely to continue to do so.
There are also some households who may be more vulnerable to both higher interest rates and who expect to be more heavily affected than average by further fiscal consolidation, although that group is relatively small.
Developments in income will be an important determinant of how households’ financial positions evolve, but will be of particular importance for more vulnerable households.
In aggregate, household debt remains high relative to income, but the cost of servicing that debt is historically low. From a distributional perspective, data from the latest NMG survey suggest that there has been a modest further improvement in the balance sheet positions of mortgagors over the past year.
The proportion of households with high DTI ratios and high DSRs has fallen slightly, while reported levels of financial distress are low and have declined a little further.
Those modest improvements in balance sheet positions imply that households are in a slightly better position to cope with an increase in interest rates than they were a year ago.
Households reported that they had more income available to meet any increase in mortgage repayments. The survey results do not imply that an increase in interest rates would have an unusually large effect on household spending
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The potential impact of higher interest rates and further fiscal consolidation on households: evidence from the 2015 NMG Consulting survey < 41 / 76 PDF DownLoad
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