Inflation and mortgage repayments: the household expenditure channel

Tamanna Adhikari
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Tamanna Adhikari: Central Bank of Ireland

No 6/FS/22, Financial Stability Notes from Central Bank of Ireland

Abstract: Ongoing inflationary conditions will reduce real incomes of those households whose wage growth is not in line with the increase in prices. In this Note, I measure the effect of general expenditure inflation on households’ mortgage repayment capacity. By defining a basket of essential items, I assess the availability of income after essential expenditure that remains to service mortgage payments, before and after an inflationary shock. The baseline and downside scenarios for 2022, in which inflation significantly exceeds nominal income growth, could lead to distress levels increasing by one-quarter to one-third respectively. Simulations show disproportionate increases in risk for lower-income, rural and older mortgage holders. Using supervisory data on Irish-domiciled non-public debt MMFs (i.e., LVNAVs and VNAVs), we provide robust graphical and econometric evidence indicating that MMFs voluntarily holding more Public-Debt Assets (PDAs) than required by MMF regulations, experienced lower outflows during the COVID-19 crisis. There is also evidence of resilience effects associated with having deposit buffers above requirements.

Date: 2022-08
New Economics Papers: this item is included in nep-ure
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