A bigger house at the cost of an empty fridge? The effect of households' indebtedness on their consumption: Micro-evidence using Belgian HFCS data

Drawing from the first two waves of the Household Finance and Consumption Survey, we investigate the potentially non-linear relation between households' indebtedness and their consumption between 2010 and 2014 in Belgium. We find a negative effect of households' indebtedness on their consumption, even in the absence of any negative shock on their assets, that appears to be related to the day-today sustainability of the debt, rather than its overall sustainability. To explore potential non-linearities in this effect, we perform a threshold analysis, whose results suggest that households should not have a debt-service-to-income ratio greater than 30% as this leads to a substantial reduction of their consumption. The effect appears to be robust to various specifications, to result from a trade-off between housing and consumption, and to be more prevalent among more fragile households.