All over the world household debt is rising. Israel is no different and according to a study done by the Taub Center, household debt increased by 84% between 2008 and 2017.
The problem is that household debt is increasing quicker than GDP growth. The level is low compared to many developed countries but it is rising. It reached a high of 41.90 % of GDP in the second quarter of 2018.
Increasing household debt in Israel is due to various factors. One is the increase in the supply of credit and more private consumption. Another is the increase in housing prices and the low interest environment.
People are taking on more consumer debt than ever before and the question of how to pay for housing lies at the center of a growing division between those in the top and bottom economic percentiles.
Increase in supply of credit
In recent years the supply of credit has increased with the entry of non-banking credit entities into the market and the integration of new technologies.
A rise in credit debt carries risks that come from households being over-leveraged. Consumers find it difficult to pay off their credit debt and their financial stability is endangered if interest rates rise or house prices fall. Total mortgage debt in Israel increased by 70% in less than a decade (between 2008 and 2017).
Concern for the bottom tenth economic percentile
The bottom tenth economic percentile of Israel’s population has been hit the hardest. Approximately half of the total population in the bottom percentile is over the age of 54 and only 9% are under 25. In the top tenth percentile, 69% are of prime working age.
Households in the top tenth percentile tend to take loans at a young age and then work them off over the years, maintaining a steady level of consumption throughout the years.
The concern is that the expansion of the credit market and rise in household debt makes households in the bottom economic percentile more financially vulnerable and if the economy slowed down, they could experience financial devastation.
Overwhelmed by debt
If consumers are overwhelmed by their debts, they need to consider getting into an IVA. This is an Individual Voluntary Arrangement whereby all the debts are consolidated and they are able to pay an affordable monthly payment to an Insolvency Practitioner.
Many people go into debt to buy clothing, cosmetics and make impulse buys, as opposed to planned expenses like rent and tuition. The best way to avoid going into unnecessary debt in the first place is to stick to a monthly budget. If consumers track their expenditures, they have a clear idea of where their money is going on a weekly or monthly basis.
They need to see whether they are spending within their income and if not, they must take steps to remedy this. Having a budget only works if consumers are disciplined about sticking to it and review expenditure consistently.
Vehicles are an expense that can keep consumers in debt. Personal finance experts will usually tell consumers that leasing a vehicle is not the best choice. Those who lease vehicles often upgrade to a new vehicle at the end of a lease. Leasing keeps them in debt because they are always making payments for an asset they are essentially renting.
In general, Israelis owe the most money to credit card companies and insurance. After this its property taxes and school fees as well as electric, water and gas bills. They need to focus on paying off existing debt, especially credit card debt and work on not spending more money than they’re earning so that they’re ultimately debt-free.