Excessive household debt: causes, trends and consequences

The decade preceding the 2008 recession was marked by a rapid rise in household debt in several regions. Strong household lending prior to the recession boosted economic growth in the affected countries, but indebtedness then became one of the main sources of vulnerability of these countries with the onset of the economic crisis. Economies that saw a rapid rise in household debt were characterised by a stronger drop in domestic demand and a longer-than-average recovery time. This analysis focuses on the evolution of household debt in Hungary. As the weight of foreign currency denominated loans within total lending in Hungary was elevated, we examine in detail the spread of foreign currency lending among households and its consequences. Viewed from an international perspective, household lending in Hungary rose sharply from the low level prevailing in the early 2000s. This expansion first appeared in HUF-denominated lending, and from 2004 this was followed by an increasing preponderance of foreign currency lending among consumer and housing loans. During the pre-crisis era, the rise of foreign currency lending was also high by regional standards. Based on our estimates, the rise in debt was a balanced process until 2006-2007, whereas after that the loan volume exceeded its long-run equilibrium level. In addition to declines in real incomes, foreign currency denominated loans also contributed substantially to this process. Since 2009 household behaviour has been shaped by strong deleveraging. Households became net loan repayers, gradually decreasing their level of debt. Due to the revaluation of foreign currency denominated loans, deleveraging is a prolonged process, and thus the high loan volume may continue to hamper a recovery in household consumption.