A bigger house at the cost of an empty stomach? The effect of households’ indebtedness on their consumption: micro-evidence using Belgian HFCS data

Abstract

This paper investigates the potentially non-linear relation between households’ indebtedness and their consumption. To do so, we use panel data from the two waves of the Belgian Household Finance and Consumption Survey. Unlike previous studies, we find a negative effect of households’ indebtedness on their consumption, even in the absence of any negative shock on their assets. Our findings suggest that, without such a shock, it is the day-to-day sustainability of the debt, rather than its overall sustainability, that leads households to reduce their consumption. The effect thus seems to occur through precautionary motives. To explore potential non-linearities in this effect, we perform a threshold analysis, whose results suggest that households should not have a debt-service-to-income ratio greater than 30% as this leads to a substantial reduction in their consumption. The effect appears to be robust to various specifications, including the inclusion of other European countries, to result from a trade-off between housing and consumption, and to be more prevalent among fragile households.