Household indebtedness in Portugal from 1961 to 2011

Household indebtedness in Portugal has drastically increased in the last 30 years, with households’ indebtedness at around 20 per cent of disposable income in 1990 increasing to 118 per cent of disposable income in 2004.

Some of this indebtedness is due an increased demand for housing. For a while rental rates were frozen, disincentivizing the rental market, while successive Portuguese governments helped low-income households into housing through the Crédito Bonificado program. In the late nineties, the downward trend in interest rates that followed the integration in the Eurozone and the expansion of credit further led to increased indebtedness and increased demand for housing.

Basel Committee on Banking Supervision suggests analyzing the difference between the private sector credit-to-GDP ratio and its long-term trend as signal of credit imbalances that can endanger the economy and the financial stability of households.

This approach has been criticized in the literature, specifically when applied to Ireland, which leads this paper to analyze its validity for Portugal. This paper concludes that the Basel Committee on Banking Supervision’s suggestion does not appear to be suitable for the case of Portugal either. The non-suitability of this approach is explained by the sharp increase of credit granted to households that ended up changing the long-term trend of the private sector credit-to-GDP ratio.

Click here to go to the paper by José Ricardo Borges Alves and Rita Maria Henriques Pereira.