Tairi Rõõm, Jaanika Meriküll
Eesti Pank Economists

• The wealth of Estonian families increased substantially between the previous financial crisis and the pandemic
• Inequality of wealth in Estonia is among the widest in the countries of the euro area
• Young families are more engaged in long-term financial planning
• The people who exited the second pension pillar were primarily those with small savings, multiple consumer loans, and credit constraints

The Household Finance and Consumption Survey for 2021 run jointly by Eesti Pank and Statistics Estonia has found that the wealth of Estonian families increased substantially between the previous financial crisis and the pandemic, as the assets of households increased by more than 50% on average in 2013-2021.

The decade between the global financial crisis and the economic crisis caused by the Covid-19 pandemic was a time of very dynamic economic development in Estonia. Incomes and asset prices rose fast, and so the wealth of families increased substantially. This growth is reported in the Household Finance and Consumption Survey (HFCS), which was run in Estonia in 2013, 2017 and 2021. The HFCS is the only dataset in Estonia that gives a picture of how the assets and liabilities of households are distributed. The median value of the net wealth of households increased by more than 50% from 43,500 euros in 2013 to 66,200 euros in 2021. The growth in the median value of net wealth was particularly fast between the two most recent surveys in 2017 and 2021, as it rose by almost 40%.

The liquid buffers of families increased substantially in 2017-2021, and the liquid net assets-to-income ratio more than doubled. This was because deposits grew fast, and the growth in deposits was strong for all levels of income. The median value of deposits increased in 2017-2021 from 1900 euros to 4300 euros. The most likely reason for the fast growth of deposits was the Covid-19 pandemic, which was still a factor while the survey was being carried out. The authorities imposed various restrictions because of the pandemic, which made it harder for households to spend on various forms of consumption such as holidays, entertainment and eating out. Saving increased in consequence, and the main method of saving, especially for the short term, is to accrue cash in a bank deposit.

The debt burden of Estonian households is smaller than the average in the euro area, but it should be remembered in this that the average income level in the euro area is higher than that in Estonia, and income growth is accompanied by financial deepening and an increase in the debt burden of households. The debt burden of Estonian families remained stable across the surveys, and financial vulnerability was at about same level in 2021 as it was in 2013. The share of families that are not able to get a bank loan, or who cannot borrow the amount that they want, remained stably at around 7% throughout the whole period.

The financial behaviour of young families changed substantially between the two most recent waves of the survey in 2017 and 2021. Investment increased in other financial assets besides deposits, such as shares or investment fund assets, and the share of young families investing more than doubled. There was a strong rise in borrowing at the same time as well, and the median value of the mortgages of the youngest group of families, where the reference person is aged 16-34, increased by around 50% from 40,000 euros to 60,000 euros. The growth of the level of debt of young families mainly occurred because of the increased volume of mortgages, while the ownership rate of unsecured loans declined. The increase in long-term borrowing, together with the change in investment habits, shows that young families are focusing more than before on their long-term financial planning. Financial literacy is also higher among the young than among older residents of Estonia.

Net wealth, which is assets minus liabilities, is unequally distributed in Estonia, and the level of wealth inequality is higher than that in most of the other euro area countries. The level of inequality remained stable in 2013-2021. An important reason for high level of wealth inequality is that the share of business assets in total assets is large in Estonia. This share is more than twice the euro area average and business assets are the least equally distributed assets. Equally though, the Estonian home ownership rate is higher than the euro area average, and that reduces wealth inequality.

The second pillar pension reform, which made it possible to withdraw accumulated pension assets, resulted in about a fifth of savers leaving the pillar when it was enacted. The first wave of those exiting withdrew 1.3 billion euros in September 2021, and the total assets of the second pillar decreased by 24%. Those who left the second pension pillar were primarily Estonian residents who had no savings, who had consumer loans, or who were unable to get a loan because of credit constraints. This profile fits with the initial estimates of how the money withdrawn from the pension investments was used, which indicate that a quarter of the money withdrawn went into consumption, and around a tenth went towards repaying loans. Financial literacy and risk aversion were also factors in the decision to exit the pillar, as those who were more financially literate were less likely to exit the pillar, while those who were risk averse proved more likely to do so.

The HFCS survey data were used to simulate how household financial vulnerability changed in the period when interest rates were rising in 2021-2023, and how it would be further affected if Euribor were to rise to 6%. The model-based estimates did not show any substantial increase in the rate of overdue loans. The simulations implied that a rise in Euribor would have a stronger impact on the interest expenses of wealthier families who have larger housing loans. Households with larger incomes have more liquid assets however and more ways to reduce their consumption expenditures, so that if their expenses increase moderately it may be assumed that they will manage to continue servicing their loans. The debt service-to-income ratio is highest for households with low incomes and a housing loan, and they may be considered the segment most vulnerable to a rise in interest rates.

The assets and liabilities of households:

• The main residence is the most valuable asset of Estonian families, and owning the home is more common in Estonia than in countries of the euro area on average
• Almost a third of non-financial assets are the assets of companies where household members work. Such business assets increased as a share of non-financial assets from 20% in 2013 to around 30% in 2021
• Bank deposits are the largest part of the financial assets of Estonian households. Estonian residents hold a smaller share of their wealth in the form of financial assets than people in the euro area on average, but there was rapid growth between 2013 and 2021 in the proportion of equities held as financial assets
• Mortgages are the largest part of the volume of household loans at around 90%
• The loan burden of Estonian households is smaller than the euro area average and it remained stable from 2013 to 2021

The Household Finance and Consumption Survey (HFCS) has been carried out regularly in the countries of the euro area since 2010. It is a comprehensive survey that covers all the countries of the euro area and allows the financial positions of households to be compared across countries. The HFCS survey was run in Estonia jointly by Eesti Pank and Statistics Estonia in 2013, 2017 and 2021.

Additional information:
Hanna Jürgenson
Eesti Pank
Tel: 56920930
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