Friday, September 7, 2012

7/9/2012: Psychological effects of debt

For our brilliant minds in politics and their 'intelectual' parrots who constantly remind us (albeit with, thankfully, decreasing frequency) that negative equity only matters when people need to move, here's one piece of latest research on links between debt (unsustainable) and mental health.


So, nothing to worry, then. The results are:
  • "...Results provide strong evidence  that respondents’ reactions to problem debt have a non-negligible social dimension in which the prevailing local level of indebtedness impacts on individual psychological stress." In other words, other's debt is not just their own problem.
  • In a multivariate model "individuals who report they face ‘difficulty’ meeting their housing payments (mortgage or rent) are at least two months late on their housing payments, or who report that meeting their consumer credit repayments presents a ‘heavy burden’ to their household, exhibit worse General Health Questionare scores and greater propensity to suffer from depression". now, note - this is not just about those who are defaulting, but also those who are facing difficulty meeting their repayments.
  • Secondly, "...selection into problem debt on the basis of poor psychological health accounts for much of  the observed cross-sectional variation in psychological health between those with and without problem debts. ...individuals who are observed to move into arrears on their housing payments or into reporting a heavy burden of debts between two waves of data exhibited, on average, worse psychological health than those not moving into debt problems in the first wave of data." In my opinion, this is likely the effect of buildup of stress prior to arrears actually arising formally and as households work through their savings, cuts to their budgets and borrowings from relatives on their way into arrears. If so, the longer the delay in dealing with problem debts (and in Ireland it is now counted in years, not months), the worse the psychological outcomes.
  • Per negative equity: " is shown that mortgage holders who enter into arrears on their mortgage debts in localities where house prices are growing (and so their home equity ‘buffer’ is increasing) suffer less deterioration in psychological health compared to individuals who enter into arrears in localities where house prices are falling (and so their home equity ‘buffer’ is decreasing). Home equity buffers have been shown to be important forms of consumption insurance for households facing adverse income shocks (Hurst et al. 2005; Benito, 2009)." Need I say more.
  • "Individuals who exhibit the onset of  problems repaying their unsecured debts in localities with a higher bankruptcy rate ...experience less deterioration in psychological health compared to individuals exhibiting the onset of problem repaying their unsecured debts in localities with lower bankruptcy rates." This is most likely accounted for by much faster and more lenient personal insolvency resolution regime in the UK in general, leaving lower stigma on those defaulting on unsecured debt.
  • "By contrast, individuals who exhibit the onset of problems repaying their secured debts in localities with higher mortgage repossession rates are shown to experience more deterioration in  psychological health compared to individuals localities with lower mortgage repossession rates." Again, the UK more developed and more lenient regime for resolving secured debts insolvencies is also at play here, in my view, as repossessions are signals of the deepest form of insolvency, and non-repossession solutions are well advanced. This implies that localities with higher rates of repossessions are more likely to have experienced much greater declines in income, rises in unemployment and/or prices declines in the property markets.
All in, I read the above evidence as the urgent signal that Ireland needs:
  1. Immediate reform of its bankruptcy laws to facilitate speedier resolution of debt problems;
  2. The reform should focus on pre-bankruptcy resolution mechanisms (as the current Government proposal does suggest) but these mechanisms must be robust and not left to the disproportionate capture by the lenders (as the current Irish Government proposed legislation does).
  3. The reform must carry emergency measures to deal with the unprecedented crisis we are facing today - in other words, the reform should not attempt to set a singular new regime for the perpetuity, but have two different regimes - Firstly: a reform to address the emergency situation with much more lenient bankruptcy arrangements for those who have acquired the unsustainable debts in the period 2002-2008, Secondly : a reform to address the future bankruptcy regime, post-emergency. The current legislation is better served for the second purpose, but it does not meet the requirements of the first objective.
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