Rising interest rates and inflation make it impossible to pay for food, bills and housing in more households. 9%, the equivalent of 1.68 million homes, do not manage to cover the so-called essential expenses with their income. They are two points more than in 2020, before the inflationary crisis broke out. This is confirmed by the Report on the financial situation of households and companies for the first semester presented yesterday by the Bank of Spain. A situation that “could recommend the introduction of economic policy measures focused on supporting this group”, he points out.
Some households, not a few, with worse incomes and more difficulties that collide with a panorama of increased incomes, savings capacity and wealth. Salary increases have led nominal incomes “to grow significantly in the last quarter of 2022 and the first of 2023”. Added to 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, but also due to the contraction of consumption. Of course, broadening the view to real income, which is obtained by measuring the impact of the CPI, pre-covid levels have not yet been recovered.
The nuances are constant. The report shows how gross wealth is increasing and debt is falling. The first figure 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 price increase and to the amortization of debt. Given the situation, those who have a cushion have preferred to amortize their mortgage because they have verified that the safe investment alternatives – mainly deposits – were not so attractive in terms of profitability. But once again, this is not repeated among all Spaniards. “Households with less income were in a worse situation to face inflation and the higher cost of their debts”, it is acknowledged. The rate hike has shot up the average cost of outstanding home loan balances by 65%, from paying an average rate of 2.3% at the end of 2021 to 3.8% in April 2023. At this point, the Bank of Spain focuses on families with variable rate debts, 29%, and those with lower incomes.
A few months ago the focus of concern was inflation, now it is the rise in interest rates. The report reiterates “the greater vulnerability of households with lower incomes to the inflationary scenario and higher interest rates”. This results in the quintile (population group) with the lowest incomes, in which almost all income goes to expenses, and they have almost no capacity to save. If in 2020 an average of 55% of their income was for basic necessities – food and basic supplies such as electricity or water –, the figure reached 79% with the payment of the mortgage or rent, a sum known as to essential expenses (basic needs and roof). The forecast is that to cover it now they need 87% of the gross income. There is a minimum margin left for leisure, education, travel, savings…
The 1.68 million households that do not cover essential expenses are a sample of this. There is a group that has it even more difficult, 4.1% who do not manage to cover essential expenses even by adding the money they have available in the bank to their income for more than a month (see graph). The Bank of Spain identifies them as “households in a particularly fragile situation”. They are seven tenths more than in 2020. If you look at the quintile with the lowest income, you find that the figure rises to 17%, 2.4 points more than three years ago.
Despite everything, delinquency remains under control. Non-performing loans fall 23% year-on-year through March, 3% of the total. In addition to the payment of loans, the rise in interest rates, with the reference rate of the European Central Bank at 4%, reduces the demand for credit, especially in mortgages. “From the summer of 2022, new financing for the acquisition of housing has been significantly reduced”, the report details. Yes, the loans that the entities put under surveillance are increasing because their risk has increased since the concession, both for housing and consumer loans. In this group there is already 6% of the total.
