Prince Henri Auditoire 02 BW

Publication of Working Paper 113 - Household debt burden and financial vulnerability in Luxembourg


Authors: Gaston Giordana and Michael Ziegelmeyer

This paper investigates financial vulnerability across the population of Luxembourg households using
balance sheet information from the 1st and 2nd wave of the Luxembourg Household Finance and
Consumption Survey. We analyse indicators of household debt burden by socio-economic
characteristics in a representative sample in the years 2010 and 2014. In addition, we identify which
household characteristics are more closely linked to financial vulnerability.

The evidence we provide does not lead to one overarching key message but draws a mixed picture
on the changes of household indebtedness and financial vulnerability in Luxembourg across the two
currently available waves (the third wave is planned to be conducted at the end of 2017/ beginning
of 2018). Although the share of indebted households fell from 58.4% in 2010 to 54.6% in 2014, on
average those households that were indebted in 2014 carried a heavier debt burden, mainly
reflecting larger mortgage loans on the main residence. Increases in the median debt-to-income ratio
and the median loan-to-value ratio of the outstanding stock are statistically significant, but those for
other debt burden indicators are not. The median debt service-to-income ratio actually declined,
reflecting mainly lower costs of non-mortgage debt.

In the related literature, financially vulnerable households are identified as those whose debt burden
indicators exceed conventional thresholds. We perform this exercise for the population of
Luxembourg households using both a single indicator approach and a multiple indicator approach.
We find that the share of financially vulnerable households did not change in a statistically significant
way between 2010 and 2014, except for the case of the debt-to-income ratio. We combine several
indicators to identify those vulnerable households that could run into serious problems and
represent a risk of losses for the lender. These households represent 1.4% of indebted households in
2010 and increase to 2.2% in 2014; this constitutes a sizable but still not statistically significant

Estimated correlations between vulnerability indicators and household characteristics also suggest
that, on the one hand, financial vulnerability is less likely for disadvantaged socio-economic groups
(in terms of education, employment and home-ownership status). On the other hand, low income
and low wealth increases the likelihood of households’ vulnerability. However, the analysis of the
median debt burden indicators suggests that low income households are those with the lowest
median debt-to-asset ratio and the lowest median loan-to-value ratio of the outstanding stock.
In summary, there is some but no unequivocal evidence that the median debt burden and the share
of financially vulnerable households increased from 2010 to 2014. Additional research is needed to
assess financial stability implications of household financial vulnerability by stress testing household
balance sheets to adverse economic shocks.

Le contenu de cette étude ne doit pas être perçu comme étant représentatif des opinions de la Banque centrale du Luxembourg ou de l’Eurosystème. Les opinions exprimées reflètent celles des auteurs et non pas nécessairement la position de la Banque centrale, de ses dirigeants ou de l’Eurosystème.

The working paper is available here.