Standard Life Investments

Weekly Economic Briefing


Unintended consequences


Eurozone debt levels increased steadily before and even during the financial crisis. Household debt increased from 76% of income in 2000, to 100% in 2008, to a peak of 108% in 2011. Since then, we have seen little evidence of significant deleveraging in the aggregate Eurozone data. However, as is often the case, the headlines obscure country trends. In countries that experienced particularly sharp accelerations in imbalances before the crisis, we have seen more substantial deleveraging. In Spain and Ireland, where housing bubbles led household debts to historic highs, both have seen debt levels fall back to pre-crisis levels (see Chart 6). Since then, Spanish house prices have recovered somewhat from their post-crisis corrections, growing 4.5% (y/y) in Q4 2016, although lending in this sector continues to fall. In Ireland, house prices have been growing even more rapidly, although again this has not been fuelled by a return to rapid aggregate household credit growth. Both countries warrant watching given the still high levels of household debt by historic and in Ireland’s case international standards.

Different deleveraging Safe as houses?

In contrast to Ireland and Spain, German households were deleveraging before the crisis and continued to do so until recently, with the household debt-to-income ratio having stabilised at a low 90%. Authorities in Germany have been voicing concerns about the impact of the ECB’s ultra-accommodative monetary policy settings on household behaviour. Household mortgage lending has been accelerating and hit 3.8%y/y in February. Against this backdrop, house prices are rising; 6.5% on the year in Q4 2016, and 30% since 2010, fuelling concerns about overheating. Most of this upward pressure is coming from demand in cities; the Bundesbank warned earlier this year that prices in German cities were between 15-30% overpriced. This pressure may have further to run; in the latest bank lending survey, demand for mortgage loans rose in Q1 after falling negative briefly in Q4 2016, driven by a combination of low interest rates, consumer confidence and house-price expectations. However, there are few signs of significant imbalances building. Germany’s household savings rate remains high and well above the Eurozone average at 17.8%. Indeed, this has actually increased since the ECB’s Asset Purchase Programme was implemented.

There are other countries which provide more compelling evidence around the unintended consequences of ultra-loose monetary policy. In Sweden and Switzerland, policymakers have loosened policy significantly, with at least one eye on preventing currency appreciation. In Sweden, where household debt has been accumulating consistently to the current 175% of income, mortgages have grown strongly post-crisis (see Chart 7). Given structural undersupply in Sweden, house-price growth has been robust in response to this demand. In response the IMF and the national bank, Riksbanken, have called for more aggressive macroprudential measures to manage this building housing-market risk. In Switzerland, debt levels are approaching 200% of disposable income. However, mortgage-loan growth has moderated to 2.6% and house-price growth appears restrained of late. Swiss authorities will be relieved following Swiss National Bank concerns about the sector last year, and may credit the relative calm to macroprudential policies. Nevertheless, high levels of debt and house prices mean that risks remain in this sector.

Stephanie Kelly, Political Economist