Vulnerable households on the rise

The proportion of households that are heavily indebted grew over the period from 2002 to 2010, increasing their vulnerability, and hence that of the broader economy, to an economic downturn.

The Melbourne Institute's latest survey, Household, Income and Labour Dynamics in Australia, which was published last week, set out to look behind the broad economic data to see how much of a problem rising household debt levels posed.

It cautioned that, while it is true that there has been an increase in the number of households that are vulnerable as a result of high debt levels, the majority of Australians have relatively little debt and, among those that do, the burden appears to be mostly within income earning capacity.

The HILDA survey defined a highly indebted household as one with debts worth more than 75 per cent of assets and more than four times the household's income.

The proportion of households with debt more than four times their income rose from 8.1 per cent, in 2002, to 13.1 per cent in 2010. And the proportion of households with debt worth more than 75 per cent of their assets rose from 6.5 per cent to 6.7 per cent over the same period.

The outcome looks better when measured using the debt-to-assets ratio, but the report said: "The benign trend apparent for the debt-to-assets ratio is somewhat misleading, due to inflated asset price growth."

In the years 2002 to 2010, the proportion of households with at least some debt increased from 65 per cent to 69.1 per cent. Over the same period, the mean (average) value of household debt grew from A$82,624 to $151,488. Median household debt grew from $10,679 to $20,081 over the survey period.

The high level of the mean is because a relatively small number of households have very high debt, which is indicated by the median being much lower than might be expected.

HILDA has six categories of debt: home, other property, business, credit card, HECS (Higher Education Contribution Scheme) and other personal (such as car loans, investment loans and overdue bills).

Credit card debt decreased as a proportion of overall debt over the survey period and is only significant for people in the bottom debt quintile.

Business debt also decreased as a proportion of overall debt and is only significant for households in the top debt quintile.

Over the period from 2002 to 2010, debt on the family home has increased as a proportion of total debt, except for households in the top debt quintile. For those in the middle quintile, it has increased from 59.2 per cent to 69.5 per cent of total debt.

Debt on the family home is the most important component for the top three debt quintiles. Debt on other property is increasing as a proportion of debt levels and is of significant proportions in the top three quintiles.

Overall, the report found that much of the increase in household debt was attributable to growth in loans for family homes and other property.

On the measure of debt to assets, the mean total debt has increased from seven per cent of assets for the median household in 2002 to nine per cent in 2010. The median household has very low debt relative to assets.

Even at the 95th debt percentile, total debt was less than total assets in 2002 and in 2010.

The proportion of households with debt in excess of assets fell from 4.3 per cent to 3.9 per cent during the survey period. And the proportion of households with debt worth more than 75 per cent of their assets rose from 6.5 per cent to 6.7 per cent.

The report said: "On the basis of the debt-to-assets ratio, it appears that indebtedness has changed little between 2002 and 2010. The proportion of households with dangerously high debt levels has decreased.

"However, there is more evidence of excessive indebtedness when the debt-to-income (disposable income) ratio is taken into account. During the survey period, median debt-to-income increased from 22 per cent to 33 per cent."

For households in the 75th debt percentile, the debt-to-income ratio increased from 159 per cent to 235 per cent. For households in the 95th debt percentile, the ratio increased from 534 per cent to 684 per cent.

The proportion of households with debt more than four times income rose from 8.1 per cent in 2002 to 13.1 per cent in 2010. The proportion of those with debt more than six times income rose from 4.1 per cent to 6.2 per cent over the same period.

Whether high household debt is a problem depends on how it is distributed in the community. Looking at the characteristics of households with high debt levels, there was a strong correlation with higher educational attainment, prime age (35 to 44) and "couple" households.

"This probably reflects people better able to cope with high debt being the ones taking on high debt," the report said.