A closer look at the data
By having a closer look at the data, we can extrapolate two key trends here:
People in countries with higher incomes tend to borrow more money on average.
This is true not just in a monetary sense (looking at the calculated debt), but also if we look at income compared to the debt-to-income ratio.
The three highest earners on our list (Luxembourg, Switzerland and Norway) all have debt-to-income ratios around the 190%-250% mark – they have debt totalling about twice their annual income.
The inverse is true as well. The three lowest earners on our list (Mexico, Chile and Hungary) all have debt-to-income ratios between 25% and 70%.
However, there are a few obvious exceptions to this rule. Despite being one of the highest earners, the United States of America only has an income-to-debt ratio of about 100% – half of what we could expect based on the other data.
Similarly, people in Portugal and South Korea both have abnormally high levels of debt considering their low-middle income. South Korea in particular borrows money at the same rate as some of the top earners while only getting paid about half as much!
While household debt is a large and complex issue, there are some key contributing factors that we can look at that may help explain this trend.
A 2011 study by the University of New England concluded that – at least for Australia – GDP is the most important determinant of household debt.1 This appears to check out for the data here as well – nations with high debt-to-income ratios tend to also have higher GDP per capita, and vice versa.2
Home loans likely play a big role in determining household debt
As we mentioned at the start of this piece, for many people, taking out a home loan may be the largest financial commitment you make in your lifetime. It stands to reason then, that if more people take out home loans, the average debt-to-income ratio will increase.
Let’s look at Europe as an example – when we map out the debt-to-income ratio and the percentage of the population that has a mortgage, the result looks like this:
Household debt as a percentage of income vs percentage of the population that hold a mortgage
Source: OECD Data and Statista
While these maps are not identical, there is clearly a strong correlation between these two statistics. Scandinavia has both a high debt-to-income ratio and a high rate of mortgage holders, while central-eastern Europe has a much lower rate of mortgage holders and comparatively little household debt.