The financial situation of households during the COVID-19 crisis: this time it is different
The economic policies implemented during the pandemic have cushioned the impact of the crisis on families’ financial situation. On the one hand, a further fall in household income has been avoided while, on the other, the ECB’s accommodative monetary policy has led to a reduction in debt interest payments. A detailed analysis of the effort required by households to pay off their mortgages, based on CaixaBank’s own internal data, duly reweighted to be representative of the Spanish population, shows that these measures have managed to reduce the mortgage burden during the pandemic for most households, although pockets of vulnerability still remain among low-income households.
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%).
- 14. These moratoriums have allowed individuals meeting certain requirements to delay the repayment of their loans for a specific period of time. By the end of 2020 there had been almost 1.5 million applications, of which more than 90% were granted. The outstanding amount of loans whose payment had been temporarily suspended due to moratorium programmes totalled almost 56.17 billion euros, equivalent to 8% of the total value of credit granted in loan portfolios eligible for a moratorium.
income and lower interest rates have eased the financial burden on households as a whole
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).
- 15. The ratio of debt to the gross disposable income (GDI) of households stood at 94.9% in June 2021, 4.2 pp higher than its pre-pandemic level.
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).
- 16. For a detailed analysis of the factors that have boosted demand for housing, see the article «Strong demand is reviving Spain’s residential market» in this Sector Report.
- 17. Despite this strong upturn in new loans, the outstanding balance of housing credit barely advanced (+0.6% year-on-year in September 2021) due to ordinary and early repayments, an aspect that would be linked to the savings accumulated during the pandemic which some households may have used to reduce their level of debt.
- 18. The theoretical mortgage burden is a statistic published quarterly by the Bank of Spain and measures the percentage of income that must be allocated by a median household to meet its mortgage repayments in the first year after acquiring a standard home financed via a standard loan for 80% of the value of the property.
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.
- 19. Specifically, we have developed an algorithm to calculate the optimal weights to ensure the 2017 results replicate the results of the 2017 Household Financial Survey, published by the Bank of Spain and representative of Spain’s population. Subsequently, the algorithm is used to calculate the optimal set of weights for each year. In this respect, the results shown below do not directly reflect the bank’s loan portfolio.
- 20. This analysis is limited to the share of mortgage loans granted to purchase the main home, only considering households with outstanding mortgage debt.
- 21. We define household income as income from labour, unemployment benefits and pensions (public and private). To divide households by income quintile, we have used the cut-off points from the Bank of Spain’s 2017 Survey of Household Finances.
- 22. Age of the main breadwinner in the household.
- 23. Note that the burden calculated using CaixaBank’s internal data is significantly lower than the ratio published by the Bank of Spain, since in this calculation we use all mortgage contracts in force while the «theoretical» burden refers to year one mortgage repayments associated with a standard loan for 80% of the current (and not historic) value of the property).
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.
low-income households still suffer from a higher concentration of financial vulnerability
Mortgage burden by income bracket
Financial stress by income bracket
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.
- 24. The increase in this group’s income has also contributed to the decrease in the burden. While income has fallen for young people during the pandemic, it has been more positive for the subset of young people with mortgage debt.
By age of head of household
By vintage (Year when mortgage was taken out)
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.