WHAT TYPES OF DEBTS DO HOUSEHOLDS HAVE?

CONTENTS
- Introduction
- Most household debt is housing debt
- Housing debt compared with housing value
- What happens at the household level?
- Investment debt
- Property debt
- Home loan debt
- Other property loan debt
- Investment loan debt
- Study loan debt
- Consumption debt
- Credit card debt
- Vehicle loan debt
- Other consumption loan debt
- Looking ahead

EXPLANATORY INFORMATION
- Data sources and definitions
- Endnotes

Related terms

household debt, housing debt, credit card debt, study debt, consumption debt, GFC

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INTRODUCTION

There are benefits associated with borrowing funds (accessing credit) to invest or consume. Credit enables a household to acquire wealth by borrowing to buy assets that increase in value over time. By borrowing funds, a household can also enjoy a higher standard of living earlier than would otherwise be possible, and can maintain consumption levels when income is insufficient for immediate use.

There are also risks associated with borrowing. If a household is unable to keep up with its debt repayments, the debt can increase and the household may experience debt collection, debt or insolvency agreements, property repossession, or the adverse consequences of bankruptcy.

This article looks at various forms of household debt using data from the ABS National Accounts and the ABS Survey of Income and Housing to identify which types of debt are contributing most to the increasing level of household debt in Australia (see companion article Trends in household debt), and which types of debt are more commonly held. For information about the types of households who have debt, see companion article Who has household debt?.


MOST HOUSEHOLD DEBT IS HOUSING DEBT

Data from Australia's national accounts at the end of 2013 showed that three quarters (75%) of all household debt was housing debt. This hasn't always been the case. In 1990, housing debt accounted for less than half (47%) of all household debt.


The total housing debt of Australian households was $1.38 trillion at the end of 2013, equivalent to $59,200 for every person living in Australia at that time. After making adjustments to remove the effect of general price inflation (giving a 'real' comparison), this was almost as high as it had been at any time in the previous 25 years, and more than six times what it had been in 1988 ($9,300 in 2013 dollars). It was also significantly higher than what it had been in 2007 ($49,100 in 2013 dollars).

In contrast, other household debt per person increased at a much slower rate than housing debt between 1988 ($8,600 in 2013 dollars) and 2007 ($20,400 in 2013 dollars). In real terms, other household debt per person has remained below the level reached in mid 2007, just prior to the onset of the Global Financial Crisis (GFC).

Housing debt compared with housing value

Debt to asset ratios are commonly used as indicators of financial health. A debt to asset ratio shows the extent to which debt is covered by the value of assets, and whether assets are of sufficient value to repay debt by selling those assets if necessary.

The housing debt of Australian households rose from a little over 11% of the value of the residential land and dwellings of Australian households at the end of September 1989 to nearly 31% of the value of the residential land and dwellings of Australian households at the end of September 2012. This housing debt to asset ratio subsequently eased to 29% at the end of 2013 after Australian residential dwelling prices resumed their upward trend in late 2012 (see companion article Trends in household debt).


At 29%, the housing debt to asset ratio of Australian households is well below the equivalent ratio prevailing in the United States when their property prices peaked in 2006. This ratio had increased to around 45% in the United States in the last couple of years of their pre-GFC housing boom, and increased well beyond 45% when their housing prices started to fall.¹
WHAT HAPPENS AT THE HOUSEHOLD LEVEL?

The overall size of the housing debt of all Australian households compared with their assets is moderated by households with considerable housing assets and little or no housing debt. The housing debt to asset ratios of some individual Australian households may be far greater than the national average, particularly if they borrowed to buy housing with a small deposit and have repaid little of the loan principal. The share of loan approvals with loan-to-valuation ratios of 90% or greater has been fairly steady since 2011, at about 13%.²

Data collected from individual Australian households in the ABS Survey of Income and Housing enables analysis of both the proportion of households with various types of debt, and levels of these types of debt among households who have such debts. This is the focus for the remainder of this article, with a particular focus on trends in investment debt and trends in consumption debt.
INVESTMENT DEBT

Property debt

In 2011-12, 40% of all of Australia's 8.6 million households had some amount of property debt (i.e. home loan debt and/or other property loan debt). More than half of these households owed less than $300,000 in property debt.

Home loan debt

Around a third of Australian households have some amount of home loan debt (i.e. principal outstanding on loans used to purchase, build, alter or make additions to the property where they usually live). Households with home loan debt had a clearly higher average level of this form of debt in 2011-12 ($224,000) than in 2003-04 ($153,000 in 2011-12 dollars).

The average value of the homes of households with home loan debt also increased in real terms between 2003-04 ($433,000 in 2011-12 dollars) and 2011-12 ($538,000), resulting in the ratio of home loan debt to home value increasing for these households from 35% in 2003-04 to 42% in 2011-12. Despite the rise in this debt to asset ratio, their average equity in their homes increased in real terms between 2003-04 ($280,000 in 2011-12 dollars) and 2011-12 ($314,000), contributing 19% of the real increase in their overall wealth between 2003-04 ($543,000 in 2011-12 dollars) and 2011-12 ($724,000).

Other property loan debt

Some households borrow to buy real estate other than the home in which they live. Such other property could be a holiday house, residential investment property, vacant land, or a commercial property such as an office, shop, factory or farm.

The proportion of households with other property loan debt increased slightly between 2003-04 (10%) and 2011-12 (12%), whereas the average amount of such debt increased considerably between 2003-04 ($239,000 in 2011-12 dollars) and 2011-12 ($357,000).

Among households with other property loan debt, the amount owing on this other property as a percentage of its value (i.e. gearing) was 53% in 2011-12 compared with 50% in 2003-04. The average equity of these households in their other property increased in real terms between 2003-04 ($243,000 in 2011-12 dollars) and 2011-12 ($321,000), contributing 27% of the real increase in their overall wealth between 2003-04 ($1,037,000 in 2011-12 dollars) and 2011-12 ($1,327,000).

Investment loan debt

Between 2003-04 and 2011-12, only 2% to 3% of Australian households had investment loan debt. However, for households who had this type of debt it tended to be sizeable (in 2011-12 dollars), averaging around $127,800 in 2003-04, $203,300 in 2005-06, $234,600 in 2009-10, and $155,400 in 2011-12.Study loan debt

Study loan debt can be considered to be investment debt rather than consumption debt. Undertaking further education is an investment in future skills, employment potential and overall earning capacity.^3,4,5 It is different to most other forms of debt in that the loan need not be repaid if the person who has incurred the debt dies, emigrates or fails to earn above a specified level of income.

Australian households became more likely to have some level of study loan debt between 2003-04 (11%) and 2011-12 (14%). This is consistent with the re-introduction of university student fees in 1989, subsequent fee increases, and greater participation in higher education. The average amount of study loan debt (in 2011-12 dollars) among households with this form of debt was similar in 2003-04 ($13,900) and 2005-06 ($14,900) before increasing to $17,300 in 2009-10. The amount of debt stayed the same in 2011-12 ($17,200).
CONSUMPTION DEBT

Credit card debt

Credit card debt is generally regarded as consumption debt rather than investment debt because this form of debt is often used to purchase goods and services that are either used up immediately or continuously depreciate in value after they've been purchased (e.g. entertainment expenses, travel fares, accommodation costs and perishable food).

Credit card debt has been a relatively common type of household debt in 21st century Australia, even though the proportion of Australian households with net credit card debt declined between 2003-04 (57%) and 2011-12 (53%).


Although credit card interest rates are relatively high (see companion article Trends in household debt), credit card debt can be short term and does not necessarily incur interest charges. An interest free period on the purchase of goods and services is a common feature of credit cards. In addition to deferring payment without interest penalty, there may be other advantages to purchasing goods and services with a credit card (e.g. free travel insurance or 3 months product protection).

While credit card debt is relatively common, the amount owed tends to be small in comparison with other forms of household debt. In real terms (i.e. in 2011-12 dollars), the average amount of credit card debt owed by households who had net credit card debt was around $4,300 in 2003-04, $4,900 in 2005-06, and $5,300 in both 2009-10 and 2011-12.


In March 2013, the Reserve Bank of Australia (RBA) reported that net repayments on personal credit and charge cards had been above average in recent years, and that balances on personal credit cards had slightly declined since mid 2012.⁶Vehicle loan debt

Amounts borrowed to purchase motor vehicles for private purposes can also be classed as consumption debt rather than investment debt, as motor vehicles tend to depreciate in value over time. As with net credit card debt, the proportion of Australian households with principal outstanding on a loan used to purchase a motor vehicle for private purposes (i.e. vehicle loan debt) decreased between 2003-04 (18%) and 2009-10 (13%), but not between 2009-10 and 2011-12 (14%).

The average amount of vehicle loan debt (expressed in 2011-12 dollars) owed by households who held this form of debt was around $18,800 in 2003-04, $20,300 in 2005-06, $18,200 in 2009-10, and $19,500 in 2011-12.Other consumption loan debt

The proportion of households with other consumption loan debt (e.g. a personal loan for a holiday) halved between 2003-04 (12%) and 2011-12 (6%). The average size of this debt (in 2011-12 dollars) among households who held this form of debt was around $15,200 in 2003-04, $20,800 in 2005-06, $15,700 in 2009-10, and $19,500 in 2011-12.
LOOKING AHEAD

In March 2014, the RBA expected the easing of interest rates that had taken place to result in rising housing prices and greater household borrowing. According to the RBA, a combination of historically low interest rates and rising housing prices could encourage speculative activity in the housing market. Another possible outcome foreseen by the RBA is that marginal borrowers could be encouraged to increase debt.²

DATA SOURCES AND DEFINITIONS Data presented and analysed in this article are mainly from the ABS Survey of Income and Housing (SIH) and the Australian System of National Accounts (ASNA). There are scope, definitional and methodological differences between the SIH and ASNA in their measurement of the economic stocks (e.g assets, debt and wealth) and flows (e.g. disposable income) of households. For a detailed explanation and quantification of the main differences, see Appendix 4 of Household Wealth and Wealth Distribution, Australia, 2011-12 (ABS cat. no. 6554.0) and Appendix 6 of Household Income and Income Distribution, Australia, 2011-12 (ABS cat. no. 6523.0). In the ASNA, households or the household sector comprises all persons, unincorporated businesses and non-profit institutions serving households (e.g. churches, charities, political parties and trade unions). Unincorporated businesses, whose activities are inextricably mixed with personal activities, are extensions of households. Non-profit institutions serving households are included because data are not available to identify their activities separately.7 In the ASNA, household assets comprise land and native standing timber, dwellings, ownership transfer costs, non-dwelling construction, machinery and equipment, cultivated biological resources, intellectual property products, inventories, superannuation and other insurance technical reserves, currency and deposits, shares and other equity, securities other than shares, loans and placements, and other accounts receivable. Housing debt is the value of lenders' loans outstanding to households for residential housing (i.e. owner-occupied housing and investment housing). Lenders comprise banks, building societies, credit cooperatives, finance companies, general financiers, registered financial corporations, government housing schemes, insurance corporations, pension funds, securitisers, housing cooperatives, and other financial institutions. For a comprehensive definition of ASNA terminology used in this article, see Australian System of National Accounts: Concepts, Sources and Methods, Australia, 2013 (ABS cat. no. 5216.0). A real value is one that has been adjusted to remove the effect of general price inflation. In this article, all original dollar values from earlier periods have been converted into latest period dollars by applying All Groups Consumer Price Index numbers for the two periods. For a detailed explanation of how this is done, complete with examples, see Consumer Price Index: Concepts, Sources and Methods, 2011 (ABS cat. no. 6461.0). Debt per person dollar values presented in this article have been calculated by dividing aggregate household sector debt by the estimated resident population of Australia at the time. Household sector debt aggregates are published in Australian National Accounts: Financial Accounts (ABS cat. no. 5232.0), and the estimated resident population of Australia at the end of each quarter (i.e. at the end of each March, June, September and December) is published in Australian Demographic Statistics (ABS cat. no. 3101.0). In the SIH, a household is defined as a person usually living alone in a private dwelling, or two or more related and/or unrelated people who usually live in the same private dwelling. A household's wealth is the value of its assets less the value of its liabilities. A debt is an obligation which requires one unit (the debtor) to make a payment or a series of payments to the other unit (the creditor) in certain circumstances specified in a contract between them. Home loan debt is principal outstanding on loans used to purchase, build, alter or make additions to the dwelling in which the household usually resides. It includes money borrowed for a deposit on their home, and bridging finance taken out until such time as a loan or mortgage is obtained or they own their home outright. Where only a proportion of a loan is used for their home, only that proportion of the principal outstanding is included. Other property loan debt is principal outstanding on loans used to purchase, build, alter or make additions to property other than the dwelling in which the household usually resides. Business and investment loans are excluded. Investment loan debt is principal outstanding on loans taken out for the purpose of financing investment, excluding loans for business purposes and rental property. Study loan debt is debt incurred under Higher Education Loans Programmes (HELP), the government education payment scheme, and other government higher education schemes. It also includes debt incurred prior to 2005 under the Higher Education Contributions Scheme (HECS) and the Student Financial Supplement Scheme (SFSS). Credit card debt is the amount owing on the latest account statement (including any government, interest or financial institution charges), regardless of whether it was paid off by the due date. Specialised retail shopping cards have been included and Visa and Mastercard debit cards have been excluded. Net credit card debt is an overall, household level debit balance after all credit card balances of household members have been summed. Vehicle loan debt is principal outstanding on loans used to purchase motor vehicles for private purposes, and excludes business and investment loans. Where only a proportion of a loan is used to purchase a vehicle, only that proportion of the principal outstanding is included. Other consumption loan debt excludes property, business and investment loan debt, unpaid overdue bills and fines, and court ordered damages payments. It describes personal loans for holidays, hire purchase, cosmetic surgery, furniture, furnishings, and other goods and services that are either fully used immediately or continuously depreciate in value after being bought. For a comprehensive definition of other SIH terminology used in this article, see Survey of Income and Housing, User Guide, Australia, 2011-12 (ABS cat. no. 6553.0). Back to top

ENDNOTES

1. Reserve Bank of Australia 2009 The Global Financial Crisis: Causes, Consequences and Countermeasures <www.rba.gov.au>
2. Reserve Bank of Australia 2014 Financial Stability Review, March 2014 <www.rba.gov.au>
3. Hui Wei 2007 Measuring Option Values and the Economic Benefits of Completing Secondary Education (ABS cat. no. 1352.0.55.082) <www.abs.gov.au>
4. Hui Wei 2008 Measuring Human Capital Flows for Australia: A Lifetime Labour Income Approach (ABS cat. no. 1351.0.55.023) <www.abs.gov.au>
5. Hui Wei 2010 Measuring Economic Returns to Post-School Education in Australia (ABS cat. no. 1351.0.55.032) <www.abs.gov.au>
6. Reserve Bank of Australia 2013 Financial Stability Review, March 2013 <www.rba.gov.au>
7. Australian Bureau of Statistics 2006 Australian System of National Accounts, 2005-06 (ABS cat. no. 5204.0) <www.abs.gov.au>