A useful indicator for judging household debt soundness? What should I pay attention to?

What is the household debt risk index, the household insolvency risk index?

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The Household Debt Risk Index (HDRI) is a useful metric that comprehensively assesses a household's ability to repay debt by considering not only income flows but also financial and real estate assets.

It combines two key factors: the Debt Service Ratio (DSR), which looks at the ratio of annual debt payments to annual income, and the Debt-to-Asset Ratio (DTA), which looks at total debt relative to total assets.

The DSR measures a household's annual debt service payments as a percentage of annual income. For example, if a household earns $60,000 per year and makes $18,000 in annual debt payments, their DSR would be 30%. A DSR above 40% is generally viewed as indicating repayment difficulties.

The DTA is calculated by dividing total household debt by total assets, including both financial assets and real estate. A DTA over 100% means debt exceeds assets, signaling repayment strain.

The HDRI itself is calculated by combining the DSR and DTA in a way that yields a value of 100 when the DSR is 40% and the DTA is 100%. Households with an HDRI above 100 are classified as "at-risk."

At-risk households are further divided into "high-risk" (income and assets both strained), "high-DTA" (assets strained), and "high-DSR" (income strained) categories.

However, being labeled at-risk or high-risk does not necessarily mean immediate default or inability to pay. It simply indicates currently strained repayment capacity, which could improve with changes in income or assets over time.

So the HDRI serves as a type of early warning system. It helps identify households facing heightened repayment risk so policymakers, lenders, and households themselves can monitor the situation and take pre-emptive action if needed.

The government and financial regulators use the HDRI to track overall household debt risk and develop policy responses. Lenders can use it to evaluate repayment ability for risk management. And households can use their HDRI number to gauge their own debt sustainability.

That said, the HDRI has limitations. A surge in home prices, for instance, could lower the DTA and HDRI despite no fundamental improvement in repayment capacity. So while a useful gauge of overall household debt health, the HDRI score alone may not accurately depict any given household's situation.

Nevertheless, by incorporating both income and asset factors in assessing household debt burdens, the HDRI provides valuable insights into debt repayment risk across the economy and for individual households as well.