The Balancing Act : Household Indebtedness over the Lifecycle

This article examines household indebtedness immediately after the Global Financial Crisis by comparing Ireland, the UK, the US, and the Euro Area. The article focuses on patterns of indebtedness across age-groups. The paper is the first to carry out this type of cross-country analysis of household debt burdens and its distribution across different household types. Compared to all other countries, Irish borrowers born from the mid-1960s through to the very early-1980s have substantially higher levels of debt – both in absolute terms and relative to their incomes. However, the low interest rate environment that has prevailed since 2008 has been particularly beneficial to these highly indebted Irish households, resulting in a debt-service burden (the ratio of debt repayments to income) that is broadly in line with that in other countries. However, in relative terms, a far greater proportion of Irish borrowers on variable rate loans are also exposed to potential interest rate rises in the future. We show that a 1 to 2% interest rate rise reduces the disposable income after debt repayments of a typical borrower by between 2 and 4%, with larger impacts for younger borrowers. As well as the impact on household spending from lower disposable incomes, there could also be financial stability implications, depending on how increases in the debt service burden affect households' ability to repay debt