Household debt in Spain hits lowest level since 2002

Household debt in Spain falls to 76.6% of income, a 22-year low

The Banco de España (the Spanish central bank) released its financial stability report for the second half of 2023 this Wednesday, and the headline is striking: households have increased their incomes and reduced their indebtedness to 76.6% of gross disposable income, the lowest level in 22 years, since 2002. Job growth, wage improvements, and pension increases have provided relief to families, who have also returned to consuming: the savings rate fell to 9.1% in the third quarter of 2023, above the 6.3% seen in the same period of 2019 but below the preceding quarters.

That is the official narrative. The debate begins when asking why this debt is falling. There are at least two ways to read this percentage: as a sign of strength or as a symptom that a growing portion of families can no longer borrow. And neither view stands alone.

Why Spanish household debt is declining

The most mechanical explanation relates to interest rates. With the cost of credit skyrocketing, borrowing is no longer profitable, and those who already have a mortgage are paying it off instead of expanding it. This is the logic of an individual who took on debt when money was cheap: now they wouldn't sign for more credit, and they are simply paying off what they already have, causing debt to shrink naturally. If rates fall again, this reasoning will reverse, and household debt will rise once more.

A demographic and generational effect also plays a role. Much of the baby boom generation is finishing their mortgage payments and has no intention of taking on new ones. Someone aged 55 who sees their loan ending is not looking to buy a second apartment; they are paying it off. The statistical result is a drop in aggregate indebtedness that says nothing about what is happening among younger populations.

There is a third, more uncomfortable factor: cash purchases. It is argued that a significant portion of real estate transactions are closed without a mortgage, which excludes families needing financing from the market and reduces the volume of outstanding debt without necessarily meaning that families are better off.

The unsettling data: less debt, less access

A critical reading of the report points to a paradox that is simple to state but difficult to digest: household debt is falling, among other things, because a segment of families can no longer afford to borrow. Access to housing—the expense that historically generated the most debt—has tightened, and many young people are not even considering buying a home or, in some cases, getting a driver's license. Credit is not disappearing because there is excess money, but because there is a lack of solvency.

On the opposite end, some point out that the report also shows an increase in credit card usage and a shrinking savings cushion for emergencies. In other words: less mortgage debt, but more expensive debt. Meanwhile, SMEs continue to face difficulties accessing credit.

The trap of comparing indebtedness ratios across countries

The debt-to-income percentage is a misleading indicator if used as a thermometer of wealth. A low ratio can reflect prudence, but also a lack of access to credit. In economies with very low incomes and underdeveloped financial systems, household indebtedness is minimal, yet no one presents it as a success of economic policy.

International comparisons serve their purpose: to remind us that 76.6% is not a medal, it is a snapshot. What matters is who is included in that picture and who is left out.

The State does not apply the same criteria

The most discussed asymmetry is this: if households reduce debt when money becomes more expensive, why don't public administrations do the same? The argument that the State, regional governments, and local councils should trinc the same discipline as families appears time and again, and there is no easy answer.

The Banco de España also points to a mitigating effect: the improvement in income, even if it hasn't outpaced inflation, has contained the rise in the percentage of vulnerable households—defined as those spending more than 40% of their income on debt servicing. This is likely the most important figure, yet it generates the fewest headlines.

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The question remains that the report does not answer: if household debt is at historic lows and consumption is recovering, why is the dominant feeling on the street the opposite? It is possible that aggregate statistics are measuring a country that is no longer the one borrowing, but the one watching others buy.