Characteristics of Households in ‘Problem Debt’ David Sturrock Andrew Hood Slide Title 1 Presentation template 2

Motivation Growing concern about unsustainable household debt Important to take debt into account alongside income when trying to assess household living standards Indication that government is going to measure and track some official measure of ‘problem debt’. Holdings of financial debts an important component of the wealth position of households approaching and in retirement We aim to use rich new panel data to look at the characteristics of households in ‘problem debt’ Definition of ‘problem debt’ crucial in ensuring that policymakers focus on the right households Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Data We use the ONS Wealth and Assets Survey (WAS) 4 waves of panel data (2006-08 to 2012-14) Analysis today uses waves 3 and 4 Over 20,000 households in each wave For the first time, we have extensive information on debt holdings and repayments for a representative sample Questions on size of repayments and duration Types of debt including loans (formal and from family/friends), credit and store cards, hire purchase, mail order, overdrafts, and arrears. Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Measuring financial debt We focus on financial debt Excludes mortgage debt We exclude student loans from student loans company Credit card and store card debt is amount outstanding Arrears counted if 2 or more repayments behind on same bill or loan £3,200 per household £695 per household not working with leading member aged 60+ 47% of households have some financial debt on this measure Total financial debt is £100bn Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt is very unequally distributed 48% of households (waves 3 and 4) held some form of financial debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Composition of UK Household Debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Those in retirement hold more of their debt as informal loans Average debt holdings of households where lead member is 60 or over and no member is working Average holding of £695. 7000 households in sample Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

More high-income households have debts Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

More working-age people have debts Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

We show deciles calculated within age-groups Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

We show deciles calculated within age-groups Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Types of debt held vary with income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Types of debt held vary with income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Types of debt held vary with income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt holdings rise with income, driven by loans, credit cards and hire purchase Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt holdings rise with income, driven by loans, credit cards and hire purchase Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt holdings rise with income, driven by loans, credit cards and hire purchase Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt holdings rise with income, driven by loans, credit cards and hire purchase Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Middle income households have moderate debts compared to income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Middle income households have moderate debts compared to income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Formal loans, credit cards and hire purchase peak on average in middle age Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Informal loans biggest amongst young and old Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt holdings peak in middle-age Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt compared to income declines with age Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Moving towards a problem debt measure Stock of debt can influence the well-being of households through a number of channels In economic terms, debts impact a household through repayments which use up disposable income We therefore want to look at the servicing costs of debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

What data do we have on servicing costs? Coverage varies by type of debt: Formal and informal loans, hire purchase and mail order: have data on duration, frequency and size of repayments Commercial student loans: repayments are not covered at all - we impute using data from other loans Credit and store cards: amount paid last month – we use this as servicing cost Overdraft and arrears: No repayment information Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt types have different repayment terms Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Debt types have different repayment terms Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Moving towards a problem debt measure Stock of debt can influence the well-being of households through a number of channels In economic terms, debts impact a household through repayments which use up disposable income We therefore want to look at the servicing costs of debt We also want to think about financial assets These could be used to repay debts Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

High income households less likely to be in net debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

High income households less likely to be in net debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

High income households less likely to be in net debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Some households approaching retirement are in net debt, even when property is included Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Some households approaching retirement are in net debt, even when property is included Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Some households approaching retirement are in net debt, even when property is included Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Moving towards a problem debt measure Stock of debt can influence the well-being of households through a number of channels: In economic terms, debts impact a household through repayments which use up disposable income We therefore want to look at the servicing costs of debt We also want to think about financial assets These could be used to repay debts Being in arrears indicates a household is struggling with payments Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Arrears are concentrated amongst low-income households Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Arrears are concentrated amongst young households Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Our measure of problem debt A household is in problem debt if either: Household is in net financial debt AND monthly financial debt repayments more than a fraction of income, OR Household is in arrears on its bills, loan or hire-purchase repayments Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Impact of each component Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Impact of each component Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Impact of each component Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Problem debt declines sharply with income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Problem debt declines sharply with income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Problem debt declines sharply with income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Impact of each component Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Impact of each component Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Impact of each component Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Problem debt declines with age Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Average debt holding highest among young and high educated Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Young and high-educated have higher debt compared to income Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

But this is being repaid at a slower rate Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Highly educated households are more likely to hold assets to cover debts Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Young and low-educated more likely to be in problem debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 45% Buying home 31% Renting 23% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 45% 9% Buying home 31% 33% Renting 23% 57% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 45% 9% Buying home 31% 33% Renting 23% 57% Bottom half of income distribution 50% 69% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 45% 9% Buying home 31% 33% Renting 23% 57% Bottom half of income distribution 50% 69% Children in household 26% 47% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of retired households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 74% Buying home 4% Renting 21% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of retired households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 74% 30% Buying home 4% 14% Renting 21% 56% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of retired households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 74% 30% Buying home 4% 14% Renting 21% 56% Bottom half of income distribution 62% 81% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of retired households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 74% 30% Buying home 4% 14% Renting 21% 56% Bottom half of income distribution 62% 81% Children in household 1% 6% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of retired households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 74% 30% Buying home 4% 14% Renting 21% 56% Bottom half of income distribution 62% 81% Children in household 1% 6% Couple 52% 48% Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Characteristics of retired households in problem debt Percentage of all households Percentage of problem debt households Owns home outright or lives rent free 74% 30% Buying home 4% 14% Renting 21% 56% Bottom half of income distribution 62% 81% Children in household 1% 6% Couple 52% 48% Single Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Households near retirement in problem debt hold large formal loans and credit card debt Average debt holdings of households where lead member is 60 or over and in problem debt Average holding of £9,655. 582 households in sample Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Taking a longer-run perspective When does (problem) debt persist? Use the fact we observe the same households multiple times Comparing future income streams to future debt repayments Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

It might make sense for the young to hold more debt Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Taking a longer-run perspective When does (problem) debt persist? Use the fact we observe the same households multiple times Comparing future income streams to future debt repayments Model expected future income, and how uncertain that is Then ask whether (or with what probability) debt is likely to become a problem In both cases, consider how these different measures relate to subjective perception of ‘problem debt’ Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Conclusion Comparing current income to current debt repayments, low-income and young households more likely to be in ‘problem debt’ Important to take arrears and assets into account if policymakers are to identify the ‘right’ households Next steps: Look at for whom (problem) debt persists over time Extend horizon to incorporate uncertain future income, and comparison with future debt repayments Investigate relationship between our objective measures of ‘problem debt’ and subjective experience Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

Home-owners have lower debt to income ratios Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies

This pattern is true of both home-owners and non home-owners Characteristics of Households in ‘Problem Debt’ © Institute for Fiscal Studies