Net balance of the Czech households´ property income decreases - 1995-2003
Product Code: e-1189-05
Net balance of the Czech households´ property income decreases
Outlets
- Gross disposable income of the Czech households composed of the primary incomes1 and net balance of the secondary incomes2, as well, increased in the current prices from CZK 837.7 bil. in 1995 to CZK 1387.9 bil. CZK in 2003. The growth of 65 % was followed by even more robust rising of the final consumption expenditure in the household sector in the current prices which was increasing during this period from CZK 724.8 bil. in 1995 to CZK 1238.1 bil. in 2003. It represents growth by 77 %. If we compare the curves of the development describing both of these national accounts´ items in chart 1 we can see almost identical growth rate of either the households´ gross disposable income or their final consumption expenditure. Correlation between these series is 0,997.
- Primary income and secondary income of the Czech households are the sources of the savings, which themselves are the supplies of tangible and financial accumulation in the sector of households. The size of the gross saving as a gap between the gross disposable income on one hand and the total final consumption (individual) in the sector of households on the other hand, adjusted forthe change in net equity of households in the pension funds reserves, reached during the 1995-2003 period the highest level in 1997 and 1998 (CZK 136.4 bil. and CZK 130.3 bil. resp.). In 1995 the gross saving was 119,4 bil. CZK and in 2003 it overshot slightly 188 bil. CZK.
Gross saving ratio measured as a percentage of the households´ gross saving on their gross disposable income had a downward trend. According figures of 2004 revision, the gross saving ratio was adapted upward for period 2002-2003 (in 2002 by 3.8 points and in 2003 by 2.9 points). In spite of it the pace of the gross saving ratio declined from 14.23 % in 1995 to 8.51 % in 2003 (even to 7.79 % according preliminary data at 2004). - Households´ equity3 (i.e. its changes due to savings and capital transfers) fell from CZK 280 bil. CZK in 1995 to CZK 137.5 bil. CZK in 2003.
Whereas the tangible accumulation of the households had (especially for item Gross fixed capital formation) strongly increasing trend and grew from CZK 57.9 bil. in 1995 to CZK 100.6 bil. in 2003, the financial accumulation decreased rapidly during mentioned period from CZK 222.1 bil. in 1995 to CZK 36.3 bil. in 2003. However, the extreme improvement in 1995 was caused by the second wave of the vouchers privatisation in Czech economy which could not have the repeatable influence for another years. But even if we eliminate this influence during period 1996-2003, advancement of the financial accumulation was considerably volatile – average annual change was CZK 35.2 bil., when the financial accumulation reached the highest level in 1997 (CZK 62 bil.) and the lowest level in 2001 (CZK 6.7 bil.). - This analysis abstracts from the view on the usage of the gross disposable income in household sector and it concentrates on the selected items of its formation – especially on the households´ primary income, which influences dynamics of the saving. The primary income is in crucial way created by primary income originating from the work, i.e. wages and salaries (CZK 849.1 bil. in 2003) and the primary income from the private enterprise (CZK 426.3 bil. in the same year). That way the both mentioned sources created 96.4 % of the primary income in the household sector and they participate by from 91.9 % on its gross disposable income.
Naturally, if the households do not use the gains of their primary incomes from the work and private enterprise for the increasing of their saving and, on the contrary, the nominal growth of this income is absorbed by the consumption, it is a question what has more influence on the saving in generating of the gross disposable income. From the curves of aggregates in the charts 3 and 4 is apparent that the Czech households´ gross saving dynamics is influenced by its net balance property income.
Increase of the wages and salaries is not synchronous with gross saving development
From the macroeconomic point of view the households´ gross saving is heterogeneous mass of facilities. Its total level arises from the different way of behaviour by which the particular agents of this sector dispose of their money: some households are able and willing to save the part of their primary income but the others, on the contrary, reach for their saving to assure their own consumption. Finally, they are households which borrow for their consumer expenditure. This overflowing of money results in total amount of money retained as a gross saving.
If the households postponed part of their present consumption and tried to save further the substantial part of the increase of their wages and salaries or profits from their enterpreneurial activities, the saving generated from primary income, i.e. from the work and their private enterprise would grow. However, unfortunately, it did not happen according to total figures from the Czech household sector. If nominal wages and salaries rose in 2003 against 1995 by 73 % and primary income from enterprise by 57 %, then in 2003 gross saving was even by 1.1 % lower against 1995. Consumer expenditure of the households increased in this period by full 77 %.
Gross saving growth matched the growth of net balance property income
Not only salaries and income from the private enterprise belong to the primary income in the household sector but the property income, as well. But in the Czech Republic the net balance of property income which affects the level of the households´ primary income and therefore also their gross disposable income is, however, substantially lower in comparison with the volume of the salaries or enterpreneurial income - in 2003 it reached CZK 50.8 bil. (households´ gross saving were CZK 118 bil.). This net balance is the gap between households´ earnings from the property on one hand and the cost (expenditure) on this property on the other hand.
Rental income from houses and flats is not part of the property income according to national accounting, in spite of the prevailing point of view that this income especially is tied up with the property (national account system sorts it to the item called Gross operating surplus and mixed income and in Czech condition is not exactly quantified by the national accounts). According to the used methodology, property income is the earning which households get from their financial assets and land – above all interest from the deposits, dividends, rent, distributed income of corporations, property income attributed to insurance policy holders and some others. Estimated income from non-formal economy belongs to property income, as well. The interest, for example, involves not only the typical earnings proceeding from the bank deposits, but also earnings from the bonds and mutual funds, i.e. other income from the financial instruments similar to interest. All information and conclusions in further text take into account, according qualification of national accounting, both revenue and expenditure sides of the households´ property income.
Gross property income decreased during last six years by 31 % from CZK 110.6 bil. in 1998 to CZK 76.4 bil. in 2003. However, it most follows the curve of the Czech households´ gross saving rate especially during 1997-2002 (chart 3) in contrast to curves of the salaries and enterpreneurial income – they are, in comparison with the gross saving rate, completely different.
Households pay for their loans more than they earn on their deposits
The interest balance of the households has deteriorated (chart 5). During the entire period 1995-2001 the households´ received interest, bond earning and earning from the mutual funds, as well, were strongly higher than their payable interest. But in 2002 the reverse occurred – the volume of money paid by households for their loans (consumer loans, mortgages, loans from construction savings, but also overdraft facilities and debit balances on current accounts and leasing interests) outnumbered firstly the volume of money received by households from their bank deposits and other named similar earnings.
In 2003 this inequality was already significant – households´ receivable interest and similar earnings fell down to CZK 14.5 bil. against CZK 56.6 bil. in 1995 while paid interest inclusive of leasing interest reached CZK 24 bil.. In the case of paid interest it was the same level as in 1998 because its growth, as the item of the expenditure side of the households´property income, was less volatile compared with the growth of the received interest. But even if we adjust the extreme development of the interest rates during bold swing of the external balance in 1997-1998, the decreasing trend of the households´ received interest income seems to be clear. It bears on the extraordinary level of the nominal interest rates of the commercial banks for their clients in this period which reflected response of the central bank for unbalanced standing in Czech economy with the elements of the monetary crisis. The attractivity of the nominal interest rates for the depositors led to the higher gains of the deposits. Sequential consolidation of the monetary conditions during last decade and favourable inflation especially during 2002 and 2003 led to the drop of the nominal interest rates and their maintenance on the demotivating level for depositors.
Non-admitted earnings are the significant part of the households´ property income
Distributed income of corporations (businesses) is very bulky item of the households´ property income. It is created by not only dividends from the stocks held by households but also by non-admitted profits of the entrepreneurs, especially small Ltd. (limited liability companies) that use part of their profits for their own consumption (this is money „to the pocket“). Thus they cause tax avoidance. Naturally, these non-admitted profits are statistically estimated only. In 2003 the volume of the non-admitted profits was almost five times higher than total dividends paid to households from profits of the corporations. So in 2003 the private entrepreneurs put to use for consumption of their households more than CZK 41.8 bil. and this money was not officially admitted. This is a serious fiscal problem of course because Czech state budget deficit was CZK 109.1 bil. in 2003, tax revenue CZK 668.3 bil. and consolidated fiscal deficit was 11.7 % GDP. It means that non-admitted profits in household sector originated from the property income cut by 6.3 % of the tax revenue and their level reached 38 % of the state budget deficit.
Dividends, non-admitted profits of the entrepreneurs and, in the fewer scale, also capital gains of the clients of the insurance companies, pension funds and rent reached almost CZK 62 bil. in 2003. These earnings were more than four times higher compared with money which Czech households received from the interest and similar gains from bonds and instruments of mutual investment.
Savings in the life insurance and pension funds grew fast…
From 1999 to 2003 the households´ net equity of life insurance reserves and pension funds reserves had double digit growth every year. So clients of the insurance companies and the pension funds gathered the strong dynamics of their paid premium and volume of reserves of these financial institutions. Money which Czech households saved every year on their accounts of the capital and investment insurance, or more accurately, how they increased their share on the life insurance reserves, grew from CZK 4.1 bil. in 1995 to CZK 16 bil. in 2002. In spite of 2003 brought stagnation from year to year, during 1995-2003 the volume of this money boosted by almost 280 %.
Czech households´ net equity of the pension funds reserves increased in comparison with the life insurance rather slowly. Against CZK 5.5 bil., by which households participated on the reserves of pension funds sector in 1995, the corresponding volume of the money in 2003 rose by 142 %.
Totally in life insurance and pension funds the Czech households achieved a three-fold increase of their yearly gains in reserves during 1995-2003.
… and the households´ income from this savings grew too
From the point of view of the property income of the household sector is important that insurance companies and pension funds further invest growing savings of the people. It brings the yield from money invested to the financial assets, estates and buildings, which insurance companies and pension funds divide among their clients. The volatility of this yield, charged on households´ accounts every year, can be partly explained by the swinging of the financial market and real estate market. In 2002, for example, it was CZK 12.7 bil. - it means twice more compared with 2000 (CZK 6.8 bil. ). In 2003 the clients gained CZK 8.4 bil.. Simultaneously in 2003 against 1995 the households´ income from the ownership of the life insurance and property in the pension funds increased by 66 %.
Gains from the land ownership
The rent onland is not only owners´ income from the leaseholder but also the yield of the owners of the inland water and rivers acquired for the franchise to use such water for the recreation and fishery. However, these gains have only marginal importance in the Czech households´ property income. Its share on the total households´ property income is almost negligible (4.1 % in 2003), in spite of its quite fast growth – in 2003 it was CZK 3.1 bil against CZK 1.3 bil. in 1995.
However, the rent on land is not only an income. It is also a part of the outlay side of the households´ property income. Annual Czech households´ expenditure for the rent on land increased from 1995 to 2003 ten times while their rent´s income increased only 2.5 times. This disproportion can be explained apart from the starting base by the fact that people also sell the land and therefore the property income of it is not so rapid. On the side of the expenditure the faster growth can be caused by increasing number of the people which enterprise in the exploitation. These entrepreneurs pay the hire cost from the rented sources.
Expenditure concerning the property stagnated…
The example mentioned above, with reference to rent as an expenditure which households dispense for their property, does not show more general problem of the relationship between Czech households´ property income and their expenditure for this property. Although in 2003 the expenditure was almost identical with the level in 1995 (CZK 25.6 bil. against CZK 24.7 bil.), during the particular years it is possible to find the differences. But these ones were not so significant as on the side of the property income (chart 6).
During 1995-2003 the households´ expenditure on their property was roughly one third or one quarter of the property income´s level (on average 28 %). However, from 1998 this expenditure/income ratio gradually climbed (from 22.4 % in 1995 to 33.5 % in 2003). Withal correlation of their series is relatively low (0.17).
Aside from small volume of the rent, paid interest of the loans and interest of the leasing are the most significant items of the Czech households´ expenditure concerning their property. Financial leasing is alternative to the loans and therefore leasing payments involve the price, which leasing companies invoice for the lease. Furthermore this is the reason for relatively high value of mentioned expenditure during 1995-2003 when financial leasing, especially of the cars, substituted the consumer loans, which banks almost did not offer. The volume of the mortgages and loans from construction savings was almost negligible in that time.
…but it will grow in the future
Household sector comprises of not only household-individuals but also household-trades. Just the loans provided to the household-trades during 1995-1997 were three times higher than during period 2000-2003. Household-trades´ loans peaked in the end of 1995 when the bank loans in this sector reached CZK 66.3 bil. while in the beginning of the 1993 they were CZK 29 bil.. This development was caused by so called „small privatisation“. At that time household-trades borrowed for enterprise in miscellaneous lines of business (especially handicrafts, retail, market services).
So with the low volume of the loans of the household-individuals during 1995-1998 the whole household sector was indebted by more than CZK 100 bil.. It led, at the high nominal interest rates, to the high level of the paid interests by this sector.
From 2000 to 2003 the household-individuals were falling in debt very fast but household-trades´ loans, on the contrary, declined considerably (CZK 25 bil.). So totally, prevalence of the housing loans, which individuals prefer, led to not so big changes in volume of the paid interest (at the lower nominal interest rates) in spite of very fast growing indebtedness of individuals at the same time. Their loans overshot CZK 210.1 bil. at the end of 2003 (and even CZK 282.9 bil. at the end of 2004) when at the end of 1995 they were only CZK 35.5 bil.. Thus non-growing curve of the paid interest from the property of the Czech households in 1995-2003 (chart 5) seems to be a paradox but it can be explained mainly by mentioned structural changes in indebtedness of the sector – while the loans of the individuals grew, the indebtedness of the household-trades decreased. All of this on the backdrop of the long-term lowering movement in the nominal interest rates.
However, expenditure concerned with property will probably further climb due to linkage of the Czech households´ debts with the housing – as a matter of course, they have long-term nature.
Conclusion
Regression analysis shows the weakening tendency to save in the Czech households during 1995-2003 in spite of the higher annual nominal gains of their gross saving during 2002-2003.
Analysis of the Czech households´ property income, defined according national accounts system, proved that this income was decreasing during last years. If in 1998 it still achieved CZK 110.6 bil. and after reduction by expenditure concerning property it was CZK 84.7 bil., then in 2003 the property earned to Czech households only CZK 76.4 bil. and with consideration of the expenditure even only CZK 50.8 bil.. So thus during six last years the net balance of the Czech households´ property income, that is to say their net annual property income, decreased by 40 %. Adjusted to the extreme interest rates development during the second half of 90´s, it is evident that in 2003 neither nominal volume of the Czech households´ property income nor its volume reduced by the expenditure for this property did not achieve the nominal levels in 1995.
Analyst:
Drahomira Dubska
Macroeconomic Analyses Section
tel. + 00 420 2 7405 4041
e-mail: dubska@gw.czso.cz
Not edited for language.
1 Generally, according ESA 95 the „primary income“ is such income, which residents get from their direct participation in the production process and which the owner of the financial assets or tangible non-produced assets get as a compensation for the provided capital or to provide at hand tangible non-produced asset to another institutional unit (ESA 95). But in the Czech conditions this determination does not contain e.g. rental revenues.
2 „Secondary income“ has a side of the revenue (items D.62 Social social benefits other then social transfers in kind, receivable, D.71 and D.75 of national accounts ESA 95 Other current transfers, payable) and side of the expenditure (D.51, D.59 Current taxes on income, wealth etc. payable, D.6112, D.6113 Social contributions and D.71, D.73 Other current transfers).
3 By involvement of the receivable and payable capital tranfers onto gross saving