The financial situation of households during the COVID-19 crisis: this time it is different

The impact of the COVID-19 crisis on households has been considerable. However, as we will see below, economic policies have played a crucial role in mitigating the adverse economic effects of the pandemic on household finances.

On the fiscal front, a series of measures were activated to support household income, most notably public transfers to workers who had been furloughed. In addition, unemployment benefits were improved, basic supplies were secured, including rent support, and a minimum living wage scheme was put in place. Legal and sectoral moratoriums on both mortgage and consummer loans were also introduced to prevent households in difficulty from defaulting on their financial obligations.¹⁴ These measures together ensured that the annual decrease in gross household disposable income (GDI) was «only» 4.9% in 2020, half the decline in nominal GDP (–9.8%).

In 2021, the rapid progress made in vaccinating the population has led to a remarkable recovery in activity. In this respect, it should be noted that the recovery in employment is more dynamic than in activity (in November 2021 the number of workers effective registered with Social Security was already above pre-pandemic levels, while GDP in Q3 2021 was still 6.6% below its level of Q4 2019). As a result of this labour market dynamism, household GDI grew by 1% in the first half of 2021, albeit remaining below its 2019 level (–3.9%).

With regard to monetary policy, the speed and forcefulness of the ECB’s actions have enabled very favourable financial conditions to be maintained, helping to reduce the interest payments associated with the debt taken by households. While the household debt ratio would have risen slightly between Q4 2019 and Q2 2021,¹⁵ the financial burden was reduced thanks to the decline in the average cost of debt, which is at an all-time low (see the chart below).

The ECB’s monetary policy is helping to reduce the average cost of household debt during the pandemic

(%)

Favourable financial conditions have boosted housing demand and this has been reflected in more credit to households for house purchases, especially in 2021, as uncertainty fell and the economic environment improved substantially.¹⁶ Specifically, new loans to purchase a home only shrank by 2.1% during 2020 and recovered by an exceptional 47.8% year-on-year in the cumulative period of January-October 2021 (also by a remarkable 37.5% when compared to the same period in 2019).¹⁷

In this context, the theoretical mortgage burden¹⁸ has hardly changed, remaining at around 30% during the pandemic, a level of debt that is generally considered to be healthy and similar to the rate recorded before the housing boom in the 2000s (see the chart below). Note that the mortgage burden has remained stable because the fall in interest rates would have offset the decline in GDI and the increase in house prices between Q4 2019 and Q2 2021 (4.5% according to the house price index produced by the National Statistics Institute).

The theoretical mortgage burden remains stable during the pandemic

(% of gross disposable income of the median household)

On the whole, the macroeconomic data paint a fairly positive picture of the financial situation of households during the pandemic, thanks largely the economic policies discussed above. However, such data can also obscure vulnerabilities if the different segments of the population are not taken into account. To analyse the impact of the crisis on the different types of household, we have used CaixaBank’s internal data, duly anonymised and reweighted to ensure they are representative of the Spanish population.¹⁹ Specifically, we calculated the mortgage burden; i.e. the ratio of mortgage repayments (reflecting the impact of lower interest rates) to household income (reflecting the impact of the income support policy),²⁰ aggregating the data according to income level,²¹ the age of the head of household²² and the year the mortgage was taken out.

The chart below shows that the median mortgage burden decreased notably in 2020, a reduction that is due to (i) the impact of mortgage moratoriums, allowing those most affected by the pandemic to defer repayment, (ii) lower interest rates, which would have eased the financial burden of mortgage debt, and (iii) a slight increase in the median income of households with mortgage debt.²³ In 2021, based on data up to October, we can see a similar burden ratio to that before the pandemic.

The mortgage burden for households with a mortgage has decreased during the pandemic

(% of household income)

When we analyse the trend in mortgage burden by income level (see the chart below), we can see that this decreased for all groups of households and that the largest reduction was experienced by households with the lowest income (–1.4 pp between 2019 and 2020). In addition, the percentage of households with a mortgage burden above 40% (a level often used as a threshold for financial stress) also fell in 2020, especially among low-income households. Despite this improvement, it is important to note that the mortgage burden of low-income households remains significantly higher than that of other households, and that the percentage of low-income households experiencing financial stress is still very high. We can therefore conclude that the measures implemented to tackle the economic crisis have been effective in easing the debt burden of most households, including low-income households. Nevertheless, the vulnerabilities that already existed in some groups before the crisis are still present.

All age groups experienced a reduction in mortgage burden in 2020. Young households were already seeing a strong downward trend before the pandemic, a result that can be explained by a larger amount of outstanding mortgage and, consequently, a greater reduction in mortgage repayments due to falling interest rates.²⁴ Finally, depending on the year when the mortgage was taken out, it can be seen that the greatest decline is concentrated among the mortgages of older cohorts (i.e. mortgages granted between 1996 and 2014, when financial conditions were very different from today), while mortgages granted since 2015, given that these were generally already taken out under more favourable conditions, would not have benefited as much from lower interest rates in the recent stage.

Essentially, the implementation of monetary and fiscal policies has limited the negative impact of the pandemic on the financial position of households, although the vulnerabilities that existed before the pandemic are still present and concentrated among low-income households. While the gradual recovery in activity will continue to support the financial situation of households, lower-income households remain dependent on the support of economic policies, so any premature withdrawal of the stimuli should be avoided. Perhaps the most important source of risk is the spike in inflation, going above 5% by the end of 2021 and fuelling expectations that the ECB will bring forward interest rate hikes. However, the ECB has stressed that the current inflationary episode is predominantly temporary in nature and the institution fully expects to continue its current expansionary monetary stance for some time yet. We should also remember that more than 65% of new mortgages are now fixed-rate, limiting the negative impact of a possible rise in interest rates on the ability of households to meet their repayments in the future.