Household indebtedness and their vulnerability to rising interest rates

High inflation and rising interest rates could increase financial vulnerability among Luxembourg households, who tend to carry significant debt. This paper uses micro-data on individual households from the Luxembourg Household Finance and Consumption Survey (HFCS) to identify pockets of financial vulnerability across the resident population. We calculate seven standard debt burden indicators and simulate their evolution through the end of 2023 based on BCL macroeconomic projections. According to several indicators, the share of financially vulnerable households increased from 2018 to 2021. Our simulations suggest this trend continued in 2022 and 2023 for those indicators that focus on the risk of delayed payment, although it may have reverted for other indicators that focus on the level of debt. Risk is concentrated among low-income households, but indebted households in this group only account for 11% of the number of mortgage contracts and 9% of aggregate household sector debt.

JEL-codes: E44, E47, G21, G28, G51 Keywords: Household debt; Financial vulnerability; Interest rates; Micro-simulation