Prepared by Marta Ruiz-Arranz with research assistance from Stephanie Denis (both IMF/EUR).
other factors affecting real house prices are discussed in: www.bankofengland.co.uk/publications/working papers/wp411.pdf.
New regulatory requirements and the unwinding of policy support, including repayments to the Special Liquidity Scheme, may increase pressure on banks’ balance sheets and affect credit availability.
The survey covers about 2000 households. Sampling techniques attempt to make the sample representative of the population. See www.bankofengland.co.uk/publications/quarterlybulletin/qb100408.pdf.
Income groups are defined as follows: low-income: gross annual income up to £17,500; low-medium income: £17,500-£35,000; medium-high income: £35,000-£60,000; and high income ££60,000.
See FSAP Technical Note, “Stress Testing the Banking Sector.”
May and Tudela (2005) find that a DSI ratio of 20 percent or above is associated with higher probability of mortgage payment problems in England. For Austria, Beer and Schurz (2007) define financially distressed households as those that have a DSI ratio above 30 percent. This note uses thresholds as in Karasulu (2008).
The two alternative thresholds are (i) two standard deviations of the average DSI within each income group; and (ii) two standard deviations of the average DSI of mortgagors reporting difficulties in paying for their mortgage (a self-reporting measure of financial distress). Results from the sensitivity analysis are similar under the three alternative measures. However, the distributional implications are different, with the uniform threshold identifying a larger number of low-income financially stressed households than the other two measures.
These aggregate figures mask important differences across household income groups. The percentage of financially stressed households decreases with household income. Low income households appear very vulnerable: over 35 percent of these households are financially stressed and more than 50 percent of this group’s total debt is at risk. However, this only represents 3.6 percent of total household sector debt.
Data coverage is limited for 2010, as not all firms had posted financial results in Worldscope. It is worth noting that due to data availability limitations, firm coverage in this analysis is smaller than in the firm-level analysis conducted at the BoE (only listed firms are included). This implies that the estimates in this analysis may not match similar estimates in BoE publications. Nonetheless, the thrust of our results and qualitative assessment are in line with the authorities’ own analysis.