The wealth, purchasing power and savings capacity of Spanish households recover after the inflationary crisis. Unless you have low income or variable rate loans, where the situation is worse, especially if the two factors are combined. This is confirmed by Report on the financial situation of households and companies of the first semester presented this Thursday by the Bank of Spain, which raises the need to deploy measures in the most urgent situations, such as that of the 9% of households that do not manage to cover essential expenses with their income -food, bills and housing- .
“Nominal income has grown notably in the last quarter of 2022 and the first of 2023, supported by the robustness of labor income and economic activity,” the report explains. Together with “the greater stability of consumer prices” it has been possible to “recover a large part of the purchasing power lost since 2021 due to inflation” and savings, although also due to the contraction in consumption. But taking a closer look, real income, which is obtained by measuring the impact of the CPI, has not yet recovered pre-covid levels.
9% of households do not cover essential expenses with their income
With these wage increases and the rise in employment, there has been an increase in gross wealth and a “remarkable” drop in the debt to income ratio, to 2003 levels. “Household wealth has increased and its debt ratio”, it is concluded. The first is due to the revaluation of financial assets and investments, because housing, a key component in the wealth of Spanish families, has slowed down. The second, to the increase in income, to a lower request for credit due to its increase in cost and to the amortization of debt. Given the scenario of rising rates, those who have a cushion have preferred to repay their mortgages when they verified that the safe investment alternatives -mainly deposits- were not so attractive due to profitability.
But again, this is not repeated among all Spaniards. “Households with lower income were in a worse situation to face inflation and the higher cost of their debts”, it is recognized. If a few months ago the focus of concern was inflation, now it is the rise in interest rates. The report confirms “the greater vulnerability of households with lower incomes to the inflationary scenario and higher interest rates”, which “could recommend” the deployment of measures focused on their situation.
Since the start of the year, with the rise in mortgage prices, “the most vulnerable segments have experienced a greater deterioration in their ability to repay the debt or to meet other expenses.” The rise in rates has triggered the average cost of the outstanding balance of household loans by 65%, which have gone from paying an average rate of 2.3% at the end of 2021 to 3.8% in April 2023. At this point, the entity pays attention to families with variable rate debts, 29%, and those with lower incomes.
With the rise in prices and rates, in the households of the lowest quintile almost 100% of the income goes to expenses, with hardly any capacity to save. This is because they are more vulnerable to inflation. In 2020, 55% of their income went to basic necessities (food and basic supplies such as electricity or water). The figure reached 79% if the mortgage or rent payment (so-called essential expenses) was added, more than double that in an average quintile. The forecast is that now to cover the weight of essentials they need 87% of gross income. There is a minimum margin left for leisure, education, travel, savings…
The situation means that 9% of households -1.68 million based on INE data- do not cover their essential expenses with their income, more than 7% in 2020. The footnote is that the calculations have not included taken into account aid deployed such as checks against inflation to low-income households, the increase in pensions and minimum vital income or the code of good practices with banks. There is a group that has it even more difficult, who cannot cover essential expenses or add the money they have in the bank to their income.
Low-income households with variable-rate debt are the worst off. “The impact of inflation and rising interest rates is more severe,” he says. The situation is repeated in the second lowest income quintile. “Vulnerability is concentrated in the first two quintiles, where financial fragility (the inability to meet monthly expenses with their income or bank balances) is higher and more deteriorated.”
The doubtful fall, but the reviews rise
In aggregate terms, delinquency is going down. Doubtful loans fell 23% year-on-year until March, to 3% of the total, although the loans that entities put under surveillance increased, 18%, both for housing and consumption and already represent 6% of the total.
The rise in rates, with the reference rate of the European Central Bank at 4% and the forecast of further increases, is reducing the demand for credit from households, especially in mortgages. “Since the summer of 2022, new financing for home acquisition has been significantly reduced,” the report details.