Analysis: Households get richer than debt

What is the property situation of Czech households? Are we getting rich or are we borrowing more and more money? Where and where are our assets stored? These and other questions are answered by a study “The Financial Behavior of Households in the Czech Republic in Theory and Practice” prepared for the Czech Banking Association by experts from the University of Economics.

“The increase in the amount of funds that households have held in current and savings accounts over the past decade is also related to a decline in interest rates on time deposits to record low levels,” explains Associate Professor Penry Ronly from the Faculty of Finance and Accounting, University of Economics.

However, the favorable development of the total volume of deposits with banks obscures the differences between households. It can be assumed that one group of households saves and creates deposits in banks, while the other group of families borrows money in banks. “From the structural point of view, the indicator that some are saving and others borrowing may be stable, but in reality a certain group of households may be over-indebted,” says co-author of the study, Professor Rick Cendel from the Faculty of Finance and Accounting, University of Economics. 

Overall, the debt burden of households is increasing

debt loan

At the same time, the analysis shows that the debt burden of households – ie the status of consumer and housing loans in relation to wages and salaries – is increasing. “Growth in this ratio indicates that indebtedness has helped stimulate economic growth, but the room for its further growth is gradually depleting,” says associate professor Penry Ronly.

The argument that household indebtedness is much higher in many developed countries than in the Czech Republic is not acceptable, according to experts. “In an international comparison, indebtedness of Czech households is smaller or even significantly smaller than that of some advanced economies, but the economic maturity of the country is only one of the criteria for assessing the adequacy of this indebtedness,” notes Penry Ronly.

According to the authors of the study, other factors also play a role, such as the tradition of rental or property housing, economic policy and the associated level of indebtedness of other sectors, the country rating and the resulting high interest rate on consumer credit.

Overall, we are getting richer, not afraid to invest anymore

A look at the overall wealth situation of Czech households shows that we are getting richer as a whole. While in 2008 Czech households owned property worth USD 9.1 trillion, in 2017 it reached USD 12.5 trillion. The total equity of Czech households thus increased by 37.5 percent over the next ten years.

With the advent of the crisis ten years ago, some households began shifting their funds to safer assets such as real estate, land and valuables. “In the last decade, households have learned to look for ways to better capitalize on their funds through profitable investments. They are no longer afraid to save their savings in financial assets, ”explains Mira Pamecnik, economic analyst at the Czech Banking Association.

In the financial assets of households, the fastest growth of holdings of long-term securities rose from USD 17 billion to USD 152 billion, which is almost nine times. “This growth is evidence of the rapidly growing interest of households in institutional bonds of domestic and multinational companies,” concludes Mira Pamecnik.