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Economic Monthly Report

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Home, sweet home

Fri, Apr 18 2008, 13:07 GMT
by La Caixa Economic Research Dept.

La Caixa

Spain now has more than 16 million households. It is here that the decisions on consumption, savings and investment that drive the economy are made. For example, household consumption in Spain comes close to 60% of gross domestic product and its growth runs parallel to that of the economy as a whole. As pointed out in one of the key boxes in this Monthly Report, this is not a matter of chance. The capacity of consumption to grow is determined by the increase in gross domestic product which, in turn, largely depends on such variables as the increase in employment and improvements in productivity.

Household consumption has changed a great deal over the years. The increase in living standards, the appearance of new products, changes in preference and relative price changes have turned around the make-up of household budgets. The most notable change in the pattern of consumption has been the reduction in the relative weight of essential goods. When people are better off they tend to spend a higher proportion of income on leisure, culture, hotels, restaurants, cured ham, and name-brand clothing, for example. They also spend money on cell phones, something that only a few years back had not even been invented.

Apart from consumption, other household decisions largely determine the course of the general economic cycle. This may be buying a house or a flat, the main non-financial investment most families make in a lifetime. Spanish statistics show that housing demand is closely allied to the establishment of households. Many other factors are involved in real estate trends but, as noted in another box in this Monthly Report, the most recent growth cycle in this sector may largely be explained by the big increase in the number of households – four million in the past 10 years. The answer lies mainly in the fact that those generations born in the Sixties and the beginning of the Seventies (who made up Spain’s «baby boom») were leaving home. Another factor operating in the same direction was heavy immigration as of the Nineties, an unexpected development with major socio-economic impact.

The strong level of home buying gave rise to an increase in household indebtedness. In the past ten years, debt of households has doubled in terms of disposable income, going from 60% to 120%. This trend has caused some concern because it has been so sharp and so fast. Nevertheless, the financial situation of households remains strong. The rise in real estate prices and the increase in value of financial assets has meant a boost in household wealth higher than that increased indebtedness. People are more heavily in debt but also wealthier.

It may be argued that these are averages that, when it comes to the crunch, do not take into account all those households that can barely pay their way each month or have problems meeting their mortgage payments. Coming down to details, the financial survey of households carried out by the Bank of Spain indicates that a high percentage of households with a head of family aged 35-44 years are in debt. As may be expected, the highest debt levels are to be found among younger people, those self-employed and those households with two family members working. However, in terms of the total number of Spanish households, the percentage of those in debt comes to merely half, so that we may expect that households will continue to be a key factor in growth of the economy.

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Published on  Fri, Apr 18 2008, 13:19 GMT