Room documents 5
Statistics Directorate
National Accounts
Household Financial Wealth: Trends, Structures and Valuation Methods
Betina Sand Christensen and Tue Mollerup Mathiasen
Paper Prepared for the 27th General Conference of The International Association for Research in Income and Wealth - Stockholm, Sweden. August 18 – 24, 2002
OECD MEETING OF NATIONAL ACCOUNTS EXPERTS
Château de la Muette, Paris
8-11 October 2002
Beginning at 9:30 a.m. on the first day
1
Session Number: Plenary session 3
Session Title: Measuring Savings, Assets, and Liabilities:
From Macro- and Microeconomic Perspectives
Paper Number: 3
Session Organizer: Barbara Fraumeni, Bureau of Economic Analysis, Washington, DC, USA
Thesia Garner, Bureau of Labor Statistics, Washington, DC, USA
Discussant: Anne Harrison
Paper Prepared for the 27th General Conference of
The International Association for Research in Income and Wealth
Stockholm, Sweden. August 18 – 24, 2002
Household Financial Wealth: Trends, Structures and Valuation Methods
Betina Sand Christensen
and
Tue Mollerup Mathiasen
For additional information please contact:
Betina Sand Christensen and Tue Mollerup Mathiasen
Sejrøgade 11
DK-2111 København Ø
and
This paper is placed on the following websites: www.iariw.org
www.econ.nyu.edu/iariw
The views expressed in this paper are those of the authors. They do not necessarily represent the views of Statistics Denmark.
Abstract
Financial Accounts are now available in most of the EU countries in a comparable framework. The measurement of household financial wealth over time is one of the core issues of these statistics. Developments in household financial wealth are important for the analysis of consumer behaviour, which is central to the size and duration of recessions in the economy and the speed of subsequent recoveries. Therefore, the structure of financial wealth of the household sector, the valuation principles and the separation of transactions from revaluations are important topics.
Starting from the issue of the household sector debt situation, the paper offers a range of arguments favouring the study of Financial Accounts. The paper then deals with important quality issues from both a conceptual and a practical viewpoint concerning full accounts versus detailed instrument classification, consistency between non-financial National Accounts and Financial Accounts plus the problem of valuing unquoted shares and other equity. Finally, the structures and developments in household financial wealth are analysed for the EU countries.
1. Introduction
The purpose of this paper is to show how detailed information on households' financial wealth provided by Financial Accounts make possible a richer discussion of the household sector[1] debt situation. In section 2, a range of issues in measuring household debt are highlighted including servicing the debt, the phenomenon of risk, the micro-macro link and the lack of data on non-financial wealth.
In section 3, the quality and comparability of Financial Accounts in the EU+[2] is in focus. First, the framework and the consistency restrictions on the full Financial Accounts are presented to form the basis for a discussion of calculation/publication strategies concerning full/partial accounts, the level of detail of the instrument classification, the issue of consistency between non-financial National Account and Financial Accounts and the calculation strategies concerning unquoted shares and other equities. In section 3.1, a partial evaluation of Financial Accounts is performed by comparing interest rate developments with revaluations of securities other than shares held by households. In section 3.2, the published household sector net lending/net borrowing from the capital account and the financial transactions account are compared for the EU+ countries. Finally, in section 3.3, calculation methods and results for household holdings of unquoted shares and other equity are presented for EU+ countries where possible. A partial analysis of variance across different implementation strategies for the same calculation method for valuation of unquoted companies in Denmark is outlined.
An economic analysis of household sector financial wealth for the EU+ countries is presented in section 4. The analysis is largely based on Financial Accounts data. Section 4.1 deals with the financial liabilities of the household sector focusing on transactions in loans, households' debt as a proportion of disposable gross income, mortgage loans and the development in real estate prices. As an illustration of the issue of households' ability to service debt, Danish mortgage lending, debt service payments to mortgage banks and household disposable income are compared. Section 4.2 turns to the asset side of the household sector balance sheet. Financial assets are compared to financial liabilities and the developments in the composition of financial assets across the EU+ is described with a reference to transactions and price changes. Finally, in section 4.3, the micro-macro link is in focus when discussing the net wealth of households.
2. Measurement of household debt
Over the last decade, a rise in household sector gross debt relative to disposable income has been observed in a number of western economies. It is sometimes argued[3] that the level of indebtedness is partly determined by procyclical behaviour in the financial system and partly by one of the main features of "New Economics"; high growth and low inflation increasing the scope for households' "money illusion"[4]. Because of the observations on household debt, it is discussed whether the level of the household sector indebtedness is important for the size and duration of a recession/downturn in an economy and the speed of the eventual recovery. The reason behind this is that a high level of indebtedness in the beginning of a recession should not give much room for an expansive monetary policy to work through the monetary transmission mechanism[5]. The higher a fixed interest rate debt proportion to total debt, the more relevant this argument seems.
Because of the fact that the discussion derives from the observation of an increased gross indebtedness, it is important to explore; what is the best way to measure indebtedness in a macroeconomic perspective, and how is this related to the microeconomic perspective?
The most direct macroeconomic effect from changes in household gross debt works through debt service payments[6]. The level of debt service payments is affected by the level of debt, interest rates and the maturity of the debt. Therefore, an increased level of household gross debt may not lead to an increased direct burden on households if real interest rates are falling and/or the maturity of the debt is increased, which may be facilitated by rising prices of real estate. Households' debt service relative to disposable income has been calculated for a few countries only (to our knowledge the U.S. and the U.K.) and shows more diverse patterns over the past ten years than is the case for the simpler measure of gross debt relative to disposable income.
A fundamental question to ask, is whether – in a macroeconomic perspective – the idea of discussing the indebtedness solely by looking at the households' liability side is too narrow after all?[7] Many economists argue that the worries based on indicators of households' liability side are exaggerated because information on the asset side is ignored – financial as well as non-financial.
First, debt service payments relative to disposable income is a measure of the debt burden based on the liability side of households. If a net measure were to be considered sufficient for macroeconomic analysis, it should be made probable that individual households (at the micro level) simultaneously engage in borrowing and lending with free funds. This is not very likely, because most households would find it very difficult to make any profits from such arrangements.
Secondly, if we look at household net wealth as opposed to household gross debt, three main issues have to be considered: The phenomenon of risk, the micro-macro link and the lack of data on non-financial wealth.
As for risk, households' net wealth does not contain any information on the risk exposure of households – risk exposure in the sense of variability of net wealth due to interest rate and price fluctuations and in the sense of differences in liquidity of financial instruments and non-financial assets. Examples of financial and non-financial transactions having no effect on either net wealth or on risk exposure can be found – but they are rare and often without much logic. Such an example is taking a bank loan and parallel to that, making a bank deposit. If no interest rate difference on loans and deposits is assumed, the present and future net wealth and risk exposure is unaffected. If instead the proceeds from the bank loan are invested in shares or property, the risk exposure is changed both in the sense of net wealth variability and exposure to differences in liquidity, although this is not the case for current net wealth. In the case of real estate investment e.g., risk exposure to price changes due to changes in interest rates[8] can be minimised by the use of financing based on bonds with long maturity which will tend to create parallel fluctuations of assets and liabilities. This, however, only moderates the fact that financial and non-financial transactions in general do affect risk exposure.
The second issue when focusing on household sector net wealth (based on macro-statistics) concerns the micro-macro link. In general, no micro-based financial household wealth statistics are available with the same consistent approach regarding stocks, transactions and revaluations as found in the "Financial Accounts" of the "System of National Accounts" (SNA93) / "European System of Accounts" (ESA95).
Financial Accounts form an integrated part of National Accounts. The non-financial National Accounts show how income is created as a result of the productive activity in an economy, distributed and re-distributed to form the basis for consumption and investment and conclude with the capital account's expression of financial net lending/net borrowing. The Financial Accounts show the financial investments and funding with a direct link to the net lending/net borrowing of each individual sector. In Financial Accounts, both the actual transactions, revaluations, defaults and stocks of a complete range of financial instruments are presented.
The weakness of Financial Accounts for macroeconomic analysis of the household sector concerns the macro-foundation of the accounts. The investments and funding of the sector form an aggregated picture, and must be analysed as such. The redistribution of wealth within the sector is not accounted for. This gives rise to classical problems when analysing and predicting the macroeconomic effects of changes to inflation, interest rates, asset prices etc. due to heterogeneity of financial wealth characteristics across individual households.
The third issue to take into account when advocating the use of household sector net wealth, as opposed to household sector gross debt in macroeconomic analysis, is the widespread lack of information on non-financial wealth of households - primarily made up of real estate. This information is an integral part of the System of National Accounts, but balance sheets for the household sector are currently only in the process of being developed in the EU countries. Information on household wealth in non-financial assets is essential in order to assess the risk exposure of households.
Two conclusions can be drawn: First, debt service payments relative to disposable income seem to be an unrivalled measure of the direct macroeconomic effects of household debt. As the calculations of this measure are partly based on detailed Financial Accounts[9], more countries should in future be able to calculate this measure. In this paper, a first partial estimate is presented for Denmark[10]. Secondly, both practical problems and theoretical arguments against a complete shift of focus in macroeconomic analysis from household sector gross debt to household sector net wealth can be listed. Nevertheless, the information on financial wealth provided by Financial Accounts would seem to allow a richer discussion of the household sector debt situation.
3. Financial Accounts - quality and comparability within the EU+
The quality of Financial Accounts is essential to the applicability of these statistics. Financial Accounts - being a part of National Accounts - form a consistent set of accounts. Consistency is a quality in its own right, but also the tool for improving quality by means of reconciliation of data derived from different sources. Due to lack of available sources, consistency restrictions (accounting identities) are used broadly across Financial Accounts in the account, sector and instrument dimensions to close the gaps. Therefore, the quality assessment of data published in Financial Accounts should be viewed in the light of consistency/inconsistency, the results of macroeconomic quality checks, the sources available and the calculation methods used. It is clear that the more detailed the instrument and sector breakdown, the more precise the macroeconomic quality checks. Last but not least, to users of Financial Accounts the level of detail and publication delays are central issues of quality.
There are three consistency restrictions on the Financial Accounts:
Consistency across accounts.
Consistency across sectors.
Consistency between non-financial National Accounts and Financial Accounts.
Consistency across accounts is achieved if for each instrument, sector and asset/liability side the following identity holds:
beginning of period stock +
financial transactions + other changes in volume[11] + revaluations º
end of period stock
Consistency across sectors is achieved, if for each instrument and account the sum over sectors on the asset side equals the liability side. E.g., net borrowing of one sector is financed by net lending of other sectors.
Consistency between non-financial National Accounts and Financial Accounts is achieved if the net lending/net borrowing in the capital account of each sector is identical to the net transactions by sector in the financial transactions account.
3.1 The issue of full accounts versus detailed instrument classification
In the European Union, a detailed programme of National Accounts data deliveries within the framework of ESA95 has been laid down in a Council Regulation[12]. Concerning Financial Accounts, the regulation stipulates the minimum requirements of the Member States. The requirements are shown in table 3.1.
Table 3.1 Financial Accounts; minimum requirements of European Union Member States[13]
Accounts / Instruments / SectorsIII.2 Financial account (trans.) / (A)F.1 Monetary gold and SDR / S.1 Total economy
IV Balance sheets / (A)F.2 Currency and deposits / S.11 Non-financial corporations
(A)F.3 Securities other than shares / S.12 Financial corporations
(A)F.4 Loans / S.121/S.122 Central Bank and other monetary financial institutions
(A)F.5 Shares and other equity / S.123 Other financial intermediaries
(A)F.6 Insurance technical reserves / S.124 Financial auxiliaries
(A)F.61 Net equity of households in / S.125 Insurance corporations and pension funds
life insurance reserves and in pension / S.13 General government
funds reserves / S.1311/S.1312 Central and state government
(A)F.62 Prepayments of insurance / S.1313 Local government
premiums and reserves for / S.1314 Social security funds
outstanding claims / S.14/S.15 Households and non-profit institutions serving households
(A)F.7 Other accounts receivable/payable / S.2 Rest of the world
If countries only satisfy the minimum requirements, consistency across accounts is no longer a restriction on the published accounts because the other changes in volume and revaluation accounts are not required. Still, a macroeconomic quality check of the non-compulsory accounts - calculated as a residual - is an indirect quality check of the accounts published.