The extent to which financial behaviour can explain over-indebtedness amongst New Zealand families
2. Family over-indebtedness in the Living Standards Survey 2004
This section outlines the Livings Standards Survey 2004 data and how they can be used to measure family over-indebtedness or ‘problem debt’.
2.1. Living Standards Survey 2004
The Living Standard Survey (LSS) 2004 was carried out by the Ministry of Social Development (MSD) to collect information on New Zealanders’ standard of living and on factors likely to explain variations in living standards within the population and between different groups. The LSS 2004 followed the LSS 2000 from which the Economic Living Standards Index (ELSI) was developed. A LSS 2008 has been completed and findings are expected in late 2009.
A total of 4,989 respondents were interviewed for the LSS 2004, representing a response rate of 62 percent. Weightings were developed against benchmarks from the 2001 Statistics New Zealand Population Census (MSD, 2006, p2).
The research presented in this paper is based on a reduced and re-weighted dataset that MSD has made available for external research purposes. This is because six percent of survey respondents did not consent to their responses being used by other researchers. Hence the reduced survey population is 4,654, representing 4,654 family groups or economic family units (EFUs) and 11,248 family members (including children). The weightings adjust the survey to a total population of 4,060,890 with 2,110,390 EFUs and 2,993,770 adults.
It should be noted that although the survey data are five years old at the time of this analysis, they are still relevant for exploring relationships between variables.
2.2. Families in the Living Standards Survey 2004
A ‘family’ or family group (or EFU) in the LSS 2004 consists of the survey respondent and their partner or spouse (if any), and their children under the age of 18 (if any). Where children under the age of 18 have their own partner or children living in the household, or they are working full time, they are considered financially independent and are treated as a separate family group. Single people are their own family group.[1]
In addition to collecting information on the composition of the respondent’s family group, the LSS 2004 collects information on the composition of the respondent’s household. Most of the questions in the survey, however, are limited to the respondent and/or their partner or spouse (ie the family level). Aside from household composition therefore, it is not possible to conduct detailed analysis of survey responses at the household level (Perry, 2007). For instance, it is not possible to calculate household income if more than two family units reside at the same house. Of the 4,654 respondents surveyed, 1,144 (25 percent) live with others – that is, they live in multi-EFU households.
While the strength of the survey is the information it provides at the family or EFU level, one has to be careful when using the data to provide insights on or to measure ‘family’ material wellbeing if resources and/or expenses are shared between multiple family units or EFUs living in the same household. In the context of the research outlined in this paper, this may have implications for the expected relationship between family income and assets and ‘problem debt’, which is discussed further in Section 4.
2.3. Over-indebtedness in the Living Standards Survey 2004
There are a number of ways of defining over-indebtedness or problem debt. It is important that any definition is clearly defined for the purpose of the study at hand (Valins, 2004, p6).
Over-indebtedness or problem debt (‘problem debt definition 1’) can be broadly defined as any situation where a person or family is unable to make ends meet. They do not have sufficient income to cover their expenses, and they do not have access to or they have already exceeded/exhausted financial options to tide them over (such as overdraft and credit cards). Faced with this situation a person or family is unlikely to meet deadlines for bill payments and/or will seek family, community or government support. In some sense, this situation can be thought of as a type of informal debt (or informal line of credit).
The LSS 2004 data effectively capture this information as ‘financial strain’. Q138, in particular, asks the respondent whether they have experienced any of the following in the last 12 months:
- you couldn’t keep up with payments for electricity, gas or water
- you couldn’t keep up with payments for mortgage or rent
- you couldn’t keep up with payments for such things as hire purchase, credit cards or store cards
- you borrowed money from family or friends to meet everyday living costs
- you received help in the form of food, clothes or money from a community organisation such as a church
- you pawned or sold something to meet everyday living costs.
Figure 1 shows that the proportion of families who experience any particular outcome is between five percent and 17 percent. Figure 1 also shows that almost 30 percent of all families have experienced at least one form of financial strain.
Figure 1: Proportion of families in financial strain
Living Standards Survey 2004 (n=varies, weighted by EFU=varies)
A more restricted but perhaps more semantically accurate definition of over-indebtedness is that it refers to those individuals or families who experience financial strain despite having access to debt (or formal lines of credit) (‘problem debt definition 2’). These are people who exhaust the financial options they have available to them. As a group they are interesting from a policy perspective because they have presumably already identified their own financial limitations by arranging formal access to credit in the first place.
The LSS 2004 provides good information on families’ access to mainstream credit, including mortgages, bank loans, student loans, hire purchase, credit cards and store cards[2]. Unfortunately the LSS 2004 does not capture information on ‘non-status‘ or ’third-tier’ credit, such as that provided by loan sharks.
This data limitation means that an obviously vulnerable group would be ignored. However, given that lack of income and assets is likely to be a key reason families in this group do not have access to mainstream credit, an independent or ‘pure’ effect of financial behaviour might be harder to isolate. In other words, limiting analysis to a more homogenous group will mean the regression model will have to work harder to find factors that make families ‘resilient’ to problem debt.
Taking this argument further, an even more stringent definition (‘problem debt definition 3’) is to look at those who not only access debt, but who report financial strain in addition to being in a negative equity position.[3]
As expected, Figure 2 shows that proportionately more families in negative equity report any form of financial strain (49 percent), compared with 32 percent of families using mainstream credit and 25 percent of all surveyed families. However, looking at Figure 2 from a ‘resilience’ perspective, a much greater proportion of all families experienced no financial strain compared with those who had access to debt.
Rather than selecting a single definition of problem debt, this report compares results for the different definitions.
It should be noted that any of the measures of problem debt may be temporary only. Over time families move in and out of different financial states, depending on their age, life stage and random events. Additional data (ideally longitudinal) are required to assess the persistence of different financial states for different families over time, as well as the degree to which the proportion and types of families in different states change over time. This is beyond the scope of this research paper.
2.4. Summary
Family over-indebtedness rather than individual or household over-indebtedness is examined as the unit of analysis in this research. Using LSS 2004 data, this effectively means that this research is looking at the financial situation of the respondent and their spouse (if any) and ignores the financial contribution or burden from other household members. The LSS 2004 does not capture this additional information.
Due to the range of possibilities for defining over-indebtedness, this paper examines the results of three possible definitions of over-indebtedness (or problem debt):
- financial strain only (problem debt definition 1)
- financial strain plus use of mainstream credit (problem debt definition 2)
- financial strain plus negative equity (problem debt definition 3).
Footnotes
- [1]
- Based on documentation provided with the survey questionnaires. [Return to reference]
- [2]
- Specific survey questions used are Q151 (total debt excluding mortgages, student loans and overdrafts), Q130 (total mortgage debt) and Q144 (student loans). The only omission in the dataset is in respect of overdrafts. Information is available on usage (Q148), but not on amount. Due to some inconsistencies between debt usage and debt amounts in the dataset, debt amounts were used for analysis of debt in this study. [Return to reference]
- [3]
- A negative equity situation is where liabilities are more than assets. Liabilities were also calculated from responses to survey questions Q151, Q130 and Q144 (see note 3). Assets were calculated from responses to questions Q127 (housing assets) and Q137 (non-housing assets). Approximately 10 observations where a respondent claimed to have a mortgage but not a housing asset, were removed from the analysis. [Return to reference]