The International Monetary Fund study Dealing with Household Debt (published in its April 2012 World Economic Outlook) notes that increases in gross household debt (mortgages, personal loans, and credit card debt), when preceding housing busts, result in significantly larger contractions in economic activity.
The effects, confirmed by statistical analysis in the study, are:
- household consumption drops substantially
real GDP and economic activity decreases for at least 5 years
- unemployment increases
Recessions preceded by larger increases in household debt are more severe.
These dynamics are affecting leading economies such as the United Kingdom and the United States (as well as Iceland, Ireland, Spain and others) where house prices collapsed during the Great Recession and the recovery was hold back by substantial amount of debt racked up in the preceding years of prosperity.