Financial Stability Review – March 2005 Box A: A Disaggregated Analysis of Household Financial Exposures

The main source of disaggregated data on household debt and assets is the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The most recent data are from the 2002 Survey, which involved 7,245 households.

The Survey shows that household debt is concentrated among upper-income households. Of the two thirds of Australian households that owed some form of debt in 2002, those in the top 30 per cent of the income distribution owed almost 60 per cent of total outstanding debt (Table A1). In contrast, households in the bottom 40 per cent of the income distribution accounted for just 14 per cent of outstanding debt. This distribution reflects both a greater number of upper-income households with debt, and higher average levels of debt among these households. Property debt of investors was even more concentrated, with three quarters of such debt owed by upper-income households.

While upper-income households owe most of the debt, they typically have lower debt-servicing burdens than other households. Of households with owner-occupier debt, those in the upper-income deciles used, on average, less than 20 per cent of their after-tax income to meet interest and principal repayments on that debt. The comparable figure for lower-income households was around a third of after-tax income (Table A2). Upper-income households are also more likely to be ahead in their mortgage repayments and hold more financial assets relative to the size of their debts. Unfortunately, the HILDA Survey does not contain information on debt servicing of investor or personal loans.

The disaggregated data also suggest that even if house prices fell significantly, the vast bulk of borrowers would not find themselves in a negative equity situation. Three quarters of those with property debt reported property-gearing ratios – property debt to property assets – of 60 per cent or less (Graph A1). The higher-income households that carried the bulk of outstanding debt typically had the lowest levels of gearing (Graph A2). Across the income distribution, ratios of total gearing – total debt to total assets – were typically lower than property gearing ratios.

Disaggregated data based on income deciles may disguise important distributional information within each income decile, so analysis of financial characteristics at an individual household level is also of interest. This analysis shows that owner-occupier debt-servicing costs were at least 50 per cent of after-tax income for around 2 per cent of all households, while property-gearing ratios were greater than 75 per cent for about 4 per cent of households (Table A3). Less than half of 1 per cent of households had both debt-servicing and gearing ratios above these levels. These higher readings on financial ratios were more common among lower-income households with owner-occupier mortgages.

Overall, disaggregated measures of debt servicing and gearing from the 2002 HILDA Survey suggest that the bulk of indebted households have some buffers against a change in their financial circumstances. This is especially the case for the higher-income households that owe most of the debt. However, the increase in aggregate debt-servicing and gearing ratios since the Survey was undertaken suggests that these disaggregated indicators may understate the exposure of some households to a change in their financial circumstances. In addition, there was a group – particularly among lower-income households – for which debt repayments occupied more than half of after-tax income, suggesting a degree of vulnerability within the household sector to a large rise in interest rates.