As the chart shows, the lion’s share of the increase takes the form of non-indexed sight deposit accounts. The total balance on such accounts came to ISK 657bn at the end of last month, an increase of ISK 166bn, or one-third in ISK terms, since September 2022. In early October, at the time of the CBI’s last policy interest rate decision, the bank’s officials pointed out the increase in household deposits was a sign of the growing impact of monetary policy on individuals’ proclivity to save.

But it should be borne in mind that a portion of this surge in deposits probably reflects outflows from other forms of savings. A handy example is savings via UCITS funds, as CBI figures show that households’ holdings in UCITS shares contracted by almost ISK 30bn over the first nine months of 2023. Nevertheless, it seems likely that a fair share of deposit growth stems from a net increase in household saving.

Monetary policy encourages saving

During the press conference following the CBI’s last policy rate decision, it emerged that in Iceland, deposit rates offered by financial institutions had kept pace with policy rate hikes more effectively than in most neighbouring countries. The Governor of the CBI posited that increased competition in the domestic deposit market probably supported monetary policy, as it was possible to achieve positive real returns on savings without a significant commitment period. This was less clearly in evidence in neighbouring countries. The CBI’s October decision to await further developments before changing the policy rate was based in part on this trend.

Have households stepped up their use of overdraft privileges?
The fact that households’ overdraft loans exceeded ISK 100bn at the end of August, for the first time on record, created quite a stir. The spike proved transitory, however, and by the end of September the stock of overdraft loans had fallen back to just under ISK 93bn. As the chart shows, however, overdraft balances have been trending upwards in ISK terms since the beginning of 2021, after having held steady in a relatively narrow range in the years beforehand.

Adjusting for developments in prices reveals a different picture, however. When calculated at constant prices, Icelandic households’ overdraft loans have shrunk steadily over the past decade or so. When adjusted to reflect the September 2023 price level, overdraft loans have contracted by one-fourth since the beginning of 2015. Because wages and disposable income have risen well in excess of inflation over the period in question, this shift reflects a significant decline in the ratio of overdraft debt to household income.

Most households are well positioned financially

The trend described above is part of a broader shift towards a healthier household debt position in recent years. According to the CBI’s Economic Indicators, debt owed by households to financial institutions amounted to just under 76% of GDP in mid-2023. This represents a drop of 25 percentage points since 2013, when household debt was roughly equal to GDP. Furthermore, households’ indexed debt had declined significantly as a share of their total debt during the period. Indexed debt totalled just over 80% of GDP a decade ago but had fallen to 37% of GDP by mid-2023, which accords with the past several years’ rise in non-indexed loans as a share of total mortgage debt.

Icelanders carry a relatively light debt burden compared to borrowers in neighbouring countries. According to Economic Indicators, Icelandic household debt totalled 154% of disposable income at the end of 2021, as compared with 206% in Denmark, 205% in Norway, and 172% in Sweden. No newer data are yet available for the latter two countries, but in Denmark the ratio had fallen to 171% in 2022. The most recent data for Iceland show a ratio of just under 150% as of mid-2023.

Of course, it should be borne in mind that interest rates have generally been higher in Iceland than in comparison countries in recent decades. On the other hand, until 2022, index-linked loans were the mainstay of Icelandic households’ debt, and these loans offer lower debt service in return for slower repayment of principal. It is therefore gratifying to see that the debt ratio in Iceland has fallen significantly, despite the availability of indexed loans in the domestic market.

One in ten households had onerous housing costs in 2022

It is important to remember, though, that the figures above are averages. Icelandic households’ financial position is as varied as the population it represents. There is little doubt that a sizeable share of households are challenged by onerous housing costs at present. Ever since 2010, Statistics Iceland (SI) has conducted surveys of households’ housing expense burden. In 2022, 10% of respondents living in their own homes reported that their housing costs represented a heavy burden. The survey also includes non-mortgage costs such as maintenance, insurance, and other regular expenses. Although this percentage might appear modest, it nevertheless represents nearly 13,000 households.

New results from SI’s living standards survey for 2023 will be published later this winter. Given that interest rates are still rising, it would come as no surprise if the percentage reporting onerous household expenses turned out higher than in 2022. But it is undeniably a more manageable task to respond to negative developments when they primarily represent a limited group of households rather than a broad swathe of the population. It is therefore important to keep track of developments in coming months and support those households that need help if the situation should deteriorate suddenly.