Household Debt in Israel

Executive Summary

The level of household debt in Israel (as a percentage of GDP) is low compared to many developed countries around the world, yet has been on the rise over the past decade as a result, in part, of the low interest environment, the rise in housing prices, and an increase in the supply of credit and private consumption that have occurred with the entry of non-banking entities into the market.

The study examines household’s level of debt by income decile, age group, and sector.

The credit market

In recent years, several regulatory measures have been taken to promote competition in the banking industry in general, and in the consumer credit market in particular.

• The supply of credit has increased as a result of the entry of non-banking entities into the credit market, the removal of technological barriers, and the integration of new technologies.
• There are four main sources of credit available to households: banks, institutional bodies, credit card companies, and government credit.
• Between 2013 and 2017, there was a 148% increase in credit granted by credit card companies, and a 140% increase in total loans granted by institutional bodies. At the same time, the growth rate of total credit granted by banks to households declined: an increase of 3.9% in 2017, compared to an increase of 7.4% in each of the five preceding years.

Household debt in Israel in the past decade

The ratio of household debt to GDP in Israel stands at 42%, while in many other countries the ratio exceeds 100% (as of 2017), yet is on the rise. The expansion of Israeli households’ debt in the past decade stems from a number of factors: the rise housing prices, the low interest environment, and an increase in the supply of credit and private consumption.

• Israel’s household debt balance at the end of 2017 stood at NIS 530 billion – an increase of 5% since 2016.
• Between 2008 and 2017, household debt increased by 84%. Total housing debt increased by 70%, while total non-housing debt increased by 114%.

Level of leveraging by income decile

An analysis of household debt level by income decile (according to a long-term household survey from 2016) raises concerns about the financial stability of households in the lowest income decile.

The share of those in debt in the bottom decile is relatively low and stands at only 18%, compared to 56% in the top decile. However, the average ratio between households’ debt and their annual income is approaching 8 in the bottom decile, meaning their total debt is equal, on average, to their total income over 8 years.

By age:

• Half the total population in the bottom decile is over age 54 and only 9% are under 25, whereas 69% of the top decile are of prime working age (25-54).
• While, in the top decile, 75% of the indebted population are of prime working age and only 22% are 54 and older, in the bottom decile, only 59% are of prime working age and 35% are 54 and older.

By sector:

• 23% of Arab Israelis in the bottom decile are in debt, and their median ratio of debt to annual income is close to 2.
• Only 15% of non-Haredi Jews in the bottom decile are in debt, but their median debt-to-income ratio is higher at about 3.
• For Haredim, 30% of those in the bottom decile are in debt, and the median ratio is 13.5.

By type of loan and sector:

• 64% of indebted non-Haredi Jews and 43% of indebted Haredim from the bottom decile took out a consumer loan, compared with 89% of indebted Arab Israelis from this decile.
• In comparison, 52% of non-Haredi Jews and 72% of Haredim from the bottom decile took out a housing loan, compared to only 15% of indebted Arab Israelis, perhaps because of difficulties Arab Israelis face in putting up collateral for housing loans.

By source of loan:

• The percentage of those who rely on non-bank sources for non-housing loans in the bottom quintile is 22.5%, compared to 12% in the top quintile.
• In contrast, the rate of applying to banks for non-housing loans is higher at the higher income levels: 88% in the bottom quintile compared to 92% in the top quintile.

The study’s findings raise concern that the expansion of the credit market and the rise in household debt would particularly affect the financial stability of households belonging to the bottom decile, and that the financial vulnerability of this population is liable to lead to its financial collapse in the case of an economic slowdown.