Objectives: Financial soundness of the household sector matters for the overall financial stability of the country. This is true that, financial stability of the household sector does not only affect the financial system but the real economy as well through household consumption and investments. The aim of this paper is to present and analyze the main measures of indebtedness.
Methods/ Statistical Analysis: The effect of different factors such as house- holds income, mortgages, and financial prudence fueling the household debts has been discussed. Granger causality test was used to find the relationship between household debts and GDP. Different ratio tests such as debt to income ratio (DIR), debt to service ratio (DSR), debt to asset ratio and household debt to real GDP were employed in the data analysis.
Findings: Debt to income ratio shows the percentage of income goes toward re- paying someone’s debt. It was found out that there is a positive relationship between household debts and GDP; if household debts increase the GDP also increases. It was also found out that household with high income tend to have high debts and vice versa.
Application: This study is helpful because it will show the importance of evaluating household debts and its impact on economic growth. The result of this study will help the policy makers to formulate strategies that are helpful in attaining sustainable financial stability. It will also help people understand the importance of managing household debts so that housing prices would not be inflated for the next generation.