1 Introduction
Household indebtedness is a global phenomenon that has increased dramatically since the mid-1990s (Finocchiaro , Nilsson, Nyberg, & Soultaneva , 2011). In many Western countries, indebtedness is raising to levels constituting a financial risk for individuals and a threat to financial stability (Lusardi & Tufano , 2009). In Sweden, which is the country that we focus on in this book, household indebtedness has over many years grown to become among the highest in Europe (Holmberg , 2013). Like in other countries, the growing household debt in Sweden applies to both consumer loans and housing loans (i.e., mortgages ). The latter category represents a significant part of the households’ total debt, implying that it constitutes a major financial risk. Heavily indebted households pose a major risk to the economy since they are particularly sensitive to exogenous shocks, such as interest rate hikes. Moreover, there is a large and growing academic literature that links excessive borrowing to impaired health, indicating that excessive debt is not only economic but also a social cost.
The importance of increased indebtedness in the Swedish society causes concern at government levels. Authorities and regulators, such as the Ministry of Finance, the Swedish Central Bank (the Riksbank ) and the Swedish Financial Supervisory Authority (SFSA) , have taken regulatory measures to reduce the increase of households’ high debt reliance aimed at mitigating too high exposures to financial risk. These measures, which either have already been implemented or currently being discussed, can be divided into two different categories. The first category includes measures aimed directly at reducing debt in society including:
- 1.The mortgage cap implemented in 2010 where a mortgage cannot exceed a maximum loan-to-value [LTV] rate of 85% of the market value of the home.
- 2.Amortization requirements implemented in 2016 where the household must maintain one percent annual amortization if the LTV is more than 50%, and two percent if the LTV is more than 70%.
- 3.A second amortization requirement implemented in 2018 where an additional amortization of one percent must be made if the mortgage exceeds 4.5 times the household’s annual income before tax.
- 4.A possible future cancellation of the current tax deduction on interest expenses (SFSA , 2018).
The second category includes higher capital requirements (and risk weights) for banks, stricter liquidity requirements , and financial advisory procedures. Measures in this category are primarily aimed at increasing the stability of the financial markets and reducing the risk of future financial crises. However, the measures may also cause the cost of borrowing to increase, thereby hampering sound credit growth.
This book is motivated by the fact that many borrowers are young adults, who tend to be less experienced than other borrowers owing to that they often take loans for the first time. It is widely reported by both governments and in current research that young adults are increasingly borrowing both to finance purchases of durable consumer products and buy their first home. In countries like Sweden, the indebtedness of young adults has followed the general trend of higher debt reliance of households and, thus, increased markedly during the past decades. This may become a significant problem in the long run for individuals as well as for the society. Young adults are in many respects extra vulnerable borrowers. Previous research shows that they are generally more ignorant than older borrowers and, in many cases, have less ability to repay their loans (Kamleitner , Hoelzl , & Kirchler , 2012). The Swedish Enforcement Authority (SEA) reports that young adults are overrepresented among debtors of small loans (Swedish Government Official Reports , 2013). Moreover, compared to other age groups, they have an average higher mortgage LTV ratios and a larger share of unsecured loans (SFSA , 2013a). The overall aim of the research reported in this book is to better understand causes and consequences of young adults’ borrowing, as well as to discuss the measures that need to be taken to reduce their indebtedness and possible over-indebtedness.
The book is based on our research program launched in 2015 with the purpose of studying young adults’ indebtedness from three perspectives: (i) the perspective of the young adult borrowers, (ii) the perspective of financial institutions that are lenders to young adult borrowers, and (iii) the legislative perspective of regulation lending and borrowing to young adults. The complexity of the problem makes it difficult to isolate one actor or present a solution based solely on changes in one perspective. Hence, the program consists of three projects based on perspectives (i), (ii), and (iii). The first project is focused on young adult borrowers in the ages from 18 to 30 years. In the empirical studies conducted in the project, we have investigated the influences on borrowing of desires of nonessential consumption , lack of liquidity , access to consumer credit (e.g., store instalments ), attitudes toward borrowing, and financial involvement and knowledge . In the second project we have investigated the relationship between financial institutions’ loan information and young adults’ borrowing. In the third project we have analyzed the various regulatory tools and measures, particularly emphasizing how such measures impact on young adults’ borrowing. Overall, the three projects of the research program contribute insights about mechanisms that drive the indebtedness of young adults and measures that can be imposed by financial institutions and regulators to encourage more sound borrowing by young adults.
In subsequent chapters, we present and discuss findings and results from the studies in the research program. We also review existing international literature addressing the question of why households and, particularly, young adults are at risk of increasing debt burdens and possible overindebtedness. The next section of this introductory chapter gives a background to the program and an overview of the various studies in the three projects. In the section that follows, an overview of the book and its structure is presented. A brief summary of the contents of each chapter is also provided. Finally, we discuss remaining gaps of knowledge and future research directions.
2 The Research Program
The research program started with a pre-study of a sample of young adult homeowners between the ages of 18 and 29 years. In a survey, the young adults exhibited a lower degree of interest in financial matters than older homeowners do, and also a lesser degree of seeking information about, for instance, mortgage rates on loans with different maturities (Skandia , 2013). We found it reasonable to assume that the young adults’ behavior regarding home loans is representative for their behavior regarding consumer loans. In either loan category, the research addressing young adults’ borrowing was scarce at the time of the pre-study and, hence, knowledge was lacking regarding the causes of young adults’ indebtedness. We therefore considered it essential to acquire an in-depth understanding of young adults’ borrowing so that adequate measures could be taken before their indebtedness increases to such levels that it turned into overindebtedness. The complexity of the problem resulted in the intention to initiate the current research program with the ambition to map and analyze causes of young adults’ indebtedness, trends in their borrowing, and opportunities to ensure that their borrowing becomes more economically sustainable for both the young adults themselves and for the society.
The research program focused on both consumer loans (including unsecured instant loans) and housing loans. In the first phase of the program, we conducted two pilot studies. The first pilot study aimed at surveying young adults’ actual access to and opportunities to take unsecured instant or short-term loans for consumption purposes as well as long-term secured (collateralized) loans or, in other words, mortgages for buying a home, how the marketing of these types of loans to young adults are designed and what loan terms are offered on the Swedish market. The second pilot study focused on developing and testing an instrument for measuring young adults’ loan-related knowledge and involvement to be applied in planned subsequent surveys. The starting point was previous surveys of mathematical/calculation skills and financial literacy of individuals and households (e.g., Lusardi & Tufano , 2009; see also Almenberg & Widmark , 2010, for a Swedish application) and their financial involvement (e.g., Aldlaigan & Buttle , 2001...