RDP 2015-01: Stress Testing the Australian Household Sector Using the HILDA Survey 3. Descriptive Statistics

Lower nominal interest rates and financial deregulation have driven an increase in the Australian household sector's aggregate level of indebtedness from around 40 per cent in the 1980s to around 150 per cent by the mid 2000s; a similar trend has also been observed in other countries. However, this does not necessarily imply that the financial fragility of the household sector has increased. Higher levels of household indebtedness are an endogenous – and expected – response to permanently lower nominal interest rates (Ellis 2005). Additionally, higher household indebtedness can facilitate consumption smoothing, consistent with life-cycle (Modigliani 1986) or permanent-income (Friedman 1957) hypotheses. Furthermore, to the extent that higher household indebtedness increases entrepreneurship and access to further education, it may raise living standards and long-run economic growth. Nevertheless, higher household indebtedness can also amplify the effects of economic and financial shocks on households (Debelle 2004).

Despite the increase in aggregate household indebtedness over the 2000s, the distribution of household debt was little changed. The share of households with some debt rose slightly over the 2000s, to be around 70 per cent in 2010. Higher-income households (those in the top 40 per cent of the income distribution) owed around three-quarters of household debt (Table 1); these households generally have the lowest debt-to-income and debt-servicing ratios. Similarly, the most asset-rich 40 per cent of households owed around three-quarters of household debt.

Households where the head was prime working age (35 to 54 years) owed about 60 per cent of household debt. However, the share of household debt owed by older households rose slightly over the decade. This probably reflected a decrease in the rate of property downsizing, increased life expectancies and a trend toward geared property investment. Even so, because older households tended to be among the wealthiest households, their increased indebtedness did not necessarily reflect a rise in the household sector's overall financial vulnerability.

Table 1: Distribution of Household Debt
Share of total household debt by household type
2002 2006 2010
Mortgagor owner-occupiers 65 71 71
Other owner-occupiers 24 18 19
Rental or other arrangement 11 11 10
Income quintiles
1st 4 4 3
2nd 9 8 8
3rd 15 17 16
4th 29 26 27
5th 43 46 46
Asset quintiles
1st 2 2 2
2nd 8 7 8
3rd 18 17 18
4th 25 25 24
5th 47 49 50
Age of household head (years)
15–34 26 26 24
35–44 35 32 30
45–54 26 28 29
55+ 12 14 17

Sources: Authors' calculations; HILDA Release 12.0

Household debt generally appears to have been well collateralised during the 2000s. The share of household debt secured by property rose slightly over the decade, to be nearly 90 per cent in 2010 (Table 2). About half of household debt was for the purchase of owner-occupier property (‘primary mortgages’). However, the rise in the share of household debt secured by housing was due to an increase in ‘other’ housing loans, such as second mortgages secured against owner-occupier property (e.g. home equity loans) and loans for the purchase of investment property. The value of credit card and other personal loans as a share of household debt both fell slightly over the decade.

Table 2: Household Debt by Product Type
Share of total household debt
2002 2006 2010
Housing – primary mortgage 50.8 50.9 50.7
Other housing 34.8 35.0 36.5
Total housing 85.6 85.9 87.2
Credit card 1.8 1.4 1.3
Other personal 12.6 12.7 11.5
Total personal 14.4 14.1 12.8

Sources: Authors' calculations; HILDA Release 12.0

Survey measures based on a broader set of households (i.e. including unindebted households) also imply that the financial health of the household sector improved over the 2000s. A number of self-reported indicators of financial stress declined, such as the share of households unable to make a bill, rental or mortgage payment on time (Figure 1).

Figure 1: Financial Stress Indicators

So, on the whole, the household sector did not appear to become less financially resilient over the 2000s. However, the economic environment was relatively benign during this period. In the following sections, we use a model to simulate the effects of large macroeconomic shocks on the household sector, with the aim of further investigating how the financial resilience of the Australian household sector has evolved over the 2000s.