This household leverage ratio measures the indebtedness of households in relation with their income, that is their spending and saving capacity. High leverage ratios are often interpreted as a sign of financial vulnerability though not only debt and liabilities but also assets should be considered in such an assessment. High indebtedness levels generally increase the financing costs of the borrower, deteriorate balance sheet positions and may restrict access to new financing.
Debt is a commonly used concept, defined as a specific subset of liabilities identified according to the types of financial instruments included or excluded. Generally, debt is defined as all liabilities that require payment or payments of interest or principal by the debtor to the creditor at a date or dates in the future.
Consequently, all debt instruments are liabilities, but some liabilities such as shares, equity and financial derivatives are not considered as debt. Debt is thus obtained as the sum of the following liability categories (according to the 1993 System of National Accounts), whenever available/applicable in the financial balance sheet of the households and non-profit institutions serving households (NPISHs) sector: currency and deposits; securities other than shares, except financial derivatives; loans; insurance technical reserves; and other accounts payable. For the households sector, liabilities predominantly consist of loans, and more particularly mortgage loans for the purchase of houses.
As a number of OECD countries are not able to provide a breakdown between households and NPISHs, household debt refers to the aggregated sector “Households and NPISHs” to ensure the highest level of comparability between countries.
Households remain highly indebted in a large number of OECD economies. In 2011, the ratio of household debt to net disposable income (NDI) was far higher than the OECD average (135%), in Denmark, the Netherlands, Ireland, Norway, and Switzerland. The Slovak Republic had the lowest debt ratio at 49.4% in 2011.
The level of household debt rose in most OECD countries over the period 2007-11. As a percentage of NDI, the Netherlands and Greece recorded the largest increases during this period (respectively around 41 and 34 percentage points). Poland showed an increase of 22 percentage points, followed by Korea with 17 percentage points. A net fall of 24 percentage points was observed in the United Kingdom and the United States, and to a (far) lesser extent in Germany, Denmark and Spain.
According to the most recent figures, long-term loans, mainly consisting of mortgage loans, remain the largest component of household debt, contributing more than 80% of the total household debt in twenty six OECD countries and even more than 90% in ten countries. In 2012, the highest levels were recorded in Switzerland (99.8%) and Canada (96.9%) and the lowest ratios were observed in Italy (69.9%), and the United States (70.7%).