Do Luxembourg residents have too much debt? Total household debt is worth 70% more than total annual household income, and it has risen faster than in the rest of Europe, says a new report by the credit rating agency Moody’s.
Most countries have seen household debt levels fall since 2007, but Luxembourg’s rose, and at the fastest rate in Europe. The ratio comparing debt to income rose 38% between 2007-2017 in the Grand Duchy. Much of this was down to the high rate of home price increases which required every larger housing loans. The report pointed to a 28% increase in home prices in this country in the five years to 2017. Two-thirds of debt in Luxembourg is from mortgage loans.
Luxembourg’s debt to income ratio rose more quickly than other wealthy countries in northern Europe, with our 38% rise greater than that in Sweden (34%), Norway (28%) and Switzerland (25%). Some comparable countries did manage to cut their indebtedness sustainability ratios: Denmark (-12%) and The Netherlands (-14%).
Despite this, Luxembourg’s household debt to disposable income ratio at 170% in 2017 was less than other developed northern European economies like Denmark (241%), Netherlands (201%), Norway (198%), Switzerland (182%) and Sweden (163%). These numbers might sound somewhat scary, but the report offers reassurance: “more economically resilient countries are able to carry higher and rising levels of household debt” without weakening the financial position of the state. Moody’s classifies all of these counties at the highest “AAA stable” rating. Incidentally, the figures for our neighbouring countries are 105% for Belgium (+28%), 90% for France (+13) and 60% for Germany (-10%).
Also Luxembourg households have a substantial financial cushion, with net financial assets being nearly three times to amount of total household income. Thus Luxembourg will probably be fine as long as the eurozone economy keeps ticking along.
However, the report also highlights points to how a sustained downturn could cause problems in Luxembourg. Given that Luxembourg has a small, open economy if a couple of the bread-and-butter activities are blown off course this could have a quick, negative impact. Also, three-quarters of mortgages have variable rate loans, so if (out of the blue) interest rates were to rise this would have an impact too.
This report follows a study by the Luxembourg Central Bank, “Stress Testing Household Balance Sheets In Luxembourg”, from July 2018 which looked at how severe economic conditions could affect bank exposure to the household sector. “Bank losses appear to be quite sensitive to severe stress,” it said, adding, “the high-stress scenario also generates a relatively high percentage of defaults among socioeconomically disadvantaged households (i.e., low net wealth, low income, low education, three or more dependent children).”