Risk Buffer Profiles of Foreign Currency Mortgage Holders

In Austria, the share of foreign currency mortgages in total household debt has been increasing since the late 1990s. Today about one-third of household credit debt is denominated in foreign currency, mostly in Swiss francs. A major issue with regard to the resulting implications for financial stability is the vulnerability of indebted households. Do foreign currency borrowers opt for foreign currency loans because they cannot afford a given loan in domestic currency? Or are foreign currency borrowers just less risk averse and better able to absorb risks than their domestic currency counterparts? We employ a subsample of the Household Survey on Housing Wealth 2008 for the first borrower analysis of this kind for Austria. Using simple linear regression techniques may be misleading given the heterogeneity of borrowers’ characteristics and the heterogeneity of differences along risk buffers. Hence we estimate conditional counterfactual distributions in order to calculate the differences in terms of risk buffers between foreign currency borrowers and their domestic currency counterparts over the entire marginal distributions of the risk buffers. We find that foreign currency borrowers have substantially higher risk buffers than their domestic currency counterparts and therefore reject the hypothesis that most of them have loans in foreign currency because they would not be able to afford the same amounts in domestic currency on account of the higher interest rate burden.