RDP 2015-01: Stress Testing the Australian Household Sector Using the HILDA Survey 7. Conclusion

In this paper, we have analysed the resilience of the Australian household sector through the 2000s using data from the HILDA Survey and a simulation-based household stress-testing model. The results suggest that the share of households whose incomes are estimated to be less than minimum expenses (i.e. with negative financial margins) fell from around 12 per cent in 2002 to 8 per cent in 2010. These households tend to have lower incomes, be younger and live in rental accommodation; however, these groups tend to hold a relatively low proportion of total household debt. Households that were more indebted did not necessarily appear to be more likely to have negative financial margins than households that were less indebted. This could be interpreted as evidence that the screening lenders carry out in assessing loan applications is effective.

Lenders' exposure to households with negative financial margins appears to have remained limited, with expected loan losses (based on the assumptions underlying our model and in the absence of any adverse shocks) increasing over the 2000s, but remaining fairly low. This increase occurred despite the share of households with negative financial margins falling over this period, implying that these households owed an increasing share of debt and/or held less valuable collateral relative to this debt. The limited increase in expected loan losses is despite a substantial increase in aggregate household indebtedness, as well as the impact of the global financial crisis on the labour market and asset prices. This suggests that aggregate measures of household indebtedness may be a misleading indicator of the household sector's financial fragility.

Although the stress-testing model used in this paper is relatively simple and relies on a number of assumptions, it generates plausible results in response to shocks to interest rates, the unemployment rate and asset prices. The results from the two stress scenarios considered – both of which incorporate a substantial increase in the unemployment rate and a substantial decline in asset prices – imply a high level of household financial resilience and limited expected loan losses for lenders. That said, the effect on expected household loan losses of a relatively severe stress scenario, under which unemployment rises, asset prices fall and interest rates are unchanged, increased over the 2000s, suggesting that the household sector's vulnerability to macroeconomic shocks may have increased a little. However, expected loan losses are actually lower under the less severe of the two scenarios, which has rising unemployment and falling asset prices comparable to Australia's experience during the financial crisis. This is due to the offsetting effect of lower interest rates, highlighting the potential for expansionary monetary policy to offset the effect of negative macroeconomic shocks on household loan losses.