Press Release: Household Debt and the Gap Between Income and Expenditure in Israel
March 20, 2018
A new Taub Center study conducted by Researcher Kyrill Shraberman, in collaboration with the Paamonim organization, analyzes the gap between Israeli household income and expenditure, and examines this gap alongside characteristics such as socioeconomic status, age, marital status, and expenditure on housing. The data show that expenditure on housing is the most significant factor in determining the gap between income and expenditure among those who are unmarried, and socioeconomic status is the most significant factor among married couples. The study also finds that there has been a rapid increase in the total liabilities of households in recent years, though an international comparison shows that the situation in Israel is relatively good
The full research will be available shortly. For the full version in Hebrew click here
A new Taub Center study conducted by Researcher Kyrill Shraberman, in collaboration with Paamonim (a non-profit organization promoting financial responsibility across Israel), examines the gap between the income and expenditure of Israeli households (hereinafter, the current gap). A negative current gap (when expenditure is greater than income) is liable to increase the household’s risk of economic difficulties.
The study examines the relationship between various household characteristics, such as socioeconomic status and age of the head of household, and the probability of having a negative gap.
The share of households with a negative gap in the Jewish population stands at about one-third of all those aged 25-60: 35% of households among married couples and 39% among unmarried persons (as of 2015).
The most influential factors on the negative gap between income and expenditure: housing and socioeconomic status
One of the most significant household expenditures is the expenditure on housing (rent or mortgage). Due to the centrality of this expenditure, and due to the fact that housing prices have risen significantly in the past decade, the Taub Center study classifies households according to the type of their expenditure on housing: rent, mortgage payments, rent and mortgage payments, or no expense.
The study found that households that pay both rent and mortgage payments (for example, households that purchased an apartment that is in the process of being built and are currently renting) have the highest negative gap among all the expenditure groups, and the gap is particularly large among unmarried households where the head of household is aged 50-60, and among 40-50-year-olds for married households. However, this is a very small share (amounting to only a few percentage points) of all households in Israel.
The study also found that most of the households that pay only mortgage payments do not have a negative gap. Households of married couples who pay only rent had a balanced average, with no significant positive or negative gaps. However, for unmarried households, there was a negative gap among much younger apartment renters (aged 25-29) and much older renters (aged 50-60). As expected, households without housing costs have almost no negative gap and, among most of them, income exceeds expenditure.
Type of housing expenditure was also found to be significant in determining the size of the negative gap in an analysis including a combination of several characteristics, such as the age of the head of household, place of residence, and socioeconomic background. Among unmarried persons, the combined expenditure on mortgages and rent is the most influential factor: this expenditure increased the per capita negative gap by 156% relative to households without housing expenditures (when other characteristics are held constant).
Expenditure on rent only increased the gap by 52%, and on mortgage payments – only by 39%. These three types of housing expenditure were the factors that most affected the size of the negative gap among unmarried persons.
Among married couples, the effect of the type of housing expenditure on the gap between expenditure and income was much lower. Expenditure on mortgages and rents increased the negative gap by 14% (the characteristic with the second-largest impact on the size of the gap), expenditures on rent only by 7% (the characteristic with the fourth-largest effect), and spending on mortgages increased the negative gap by only 1% relative to households with the same characteristics that have no housing expenditures.
In contrast, among households of married couples, socioeconomic class is the most influential factor in determining the size of the negative gap. Having a lower socioeconomic standing (belonging to the bottom income quintile) increases the negative gap by 23% relative to households with a high socioeconomic status (belonging to the top quintile). Among unmarried persons, having a lower socioeconomic standing increases the negative gap by 37% but, as stated above, the type of household expenditure is a more influential factor for this group.
Expenditures on clothing and cosmetics and housing costs increase the negative gap
The Taub Center study also analyzes the effect that consumption categories have on the size of the negative gap. The findings indicate that expenditures on “personal expenses” – including clothing and footwear, laundry services, haircuts, and cosmetics – increase the negative current gap at the highest rate both among those who are married (7.2%) and those who are unmarried (4.6%). It is reasonable to assume that the reason this category has such a large influence is that these expenditures, though not frequent, are relatively large and often unplanned, making it difficult to effectively manage the budget, as opposed to regular and planned expenses such as rent, education, and home maintenance.
The expenditure with the second-largest effect on the negative gap among unmarried persons is expenditure on a mortgage: 3.8% (compared with 1.9% among married couples). Among married couples, the expenditure with the second-largest effect is home maintenance (water, electricity, municipal taxes, and gas), which increases the negative gap by 6.8% (among unmarried persons, the effect of this expenditure is not significant).
The leading entity to which households are indebted – the banks
Shraberman’s research is based, among other things, on data from Paamonim, which enabled him to analyze household debt in Israel (data that are not fully available from other sources). The study includes an analysis that classifies liable households by the entity to which they owe money: (1) banks – debt resulting from loans, credit charges, debit balances, and mortgage payment delays; (2) commercial bodies – debt to suppliers and service providers (including municipal property taxes and electricity payments), non-bank loans (insurance and credit companies), payments to educational institutions, and more; (3) family and friends.
Most households in debt (93%) owe money to banks, 46%-51% owe money to friends and family, and between 21% and 37% owe money to commercial entities.
An analysis by age group found that total average debt (to all three types of entities) increased with age: the average debt in the 25-29 age group was NIS 150,000, compared to NIS 315,000 in the 50-60 age group. The highest debt to banks was recorded for households in the 45-49 age group, and the highest debt to family and friends, as well as to commercial entities, was recorded among those aged 50-60.
Comparing total debt by socioeconomic status (income quintiles) shows that there is no significant gap between the quintiles in the amount of debt owed, but there are gaps in the distribution of the entities to which households are indebted.
While the top income quintile owed the highest amount to banks (approximately NIS 174,000) the lowest quintile owed the lowest amount to the banks (approximately NIS 88,000). On the other hand, the bottom quintile owed the highest amount to family and friends (approximately NIS 110,000). These data show that, due to the low income of households in the lowest quintile, banks do not grant them high credit ratings, but they manage to raise funds from friends and family.
An in-depth analysis of debt to commercial entities shows that the most common type of debt in this category is financial debt – mainly credit from non-banking entities (insurance companies or credit card companies, for example). The second-largest type of debt is property taxes and fines, the third-largest is education spending, and the fourth-largest is debt to infrastructure suppliers (electricity, water, and gas).
According to Shraberman, “this means that home maintenance and education costs contribute more to households’ financial difficulties than discussed in the study, due to a tendency to delay these payments in order to cope with immediate economic difficulties.”
Total liability in the economy rose rapidly, but an international comparison shows that the situation in Israel is relatively good
An analysis of total liabilities taken by households in Israel shows that since 2007 there has been an increase in the growth rate of liabilities. An international comparison shows that the leverage (the ratio of total liability to GDP) of households in Israel is very low compared to other developed countries: the share of liability stands at 41% of GDP in Israel, compared with an average of 66% of GDP in the OECD.
The Taub Center for Social Policy Studies in Israel is an independent, non-partisan socioeconomic research institute. The Center provides decision makers and the public with research and findings on some of the most critical issues facing Israel in the areas of education, health, welfare, labor markets and economic policy in order to impact the decision-making process in Israel and to advance the well-being of all Israelis.
For details, or to arrange an interview, please contact Anat Sella-Koren, Director of Marketing, Communications and Government Relations at the Taub Center for Social Policy Studies in Israel: 050-690-9749.