WHO HAS HOUSEHOLD DEBT?

CONTENTS
- Introduction
- How common is household debt?
- Do the wealthiest households carry the least debt?
- Are low income households heavily in debt?
- Relationship between employment and debt
- Do we borrow when young and repay before retirement?
- How long do households stay heavily in debt?
- Conclusion

EXPLANATORY INFORMATION
- Data sources and definitions
- Endnotes

Related terms

home loan debt, investment debt, credit card debt, debt free, income, wealth, high income, low income

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INTRODUCTION

Like income and wealth,¹ debt isn't distributed evenly among Australian households. Some households have high levels of debt while others have no debt whatsoever. A high level of debt could be difficult to manage for some households with few assets and little income. On the other hand, high levels of debt held by some wealthy, high income households could reflect their desire and ability to use debt to acquire wealth faster than would have been possible if they hadn't borrowed.

Being debt free does not necessarily indicate financial wellbeing. While some households might relish the opportunity for more discretionary spending after their debts have been fully repaid, the debt-free status of some other households could reflect their inability to borrow money because lenders assess them as not being creditworthy. Such households may fail to qualify for a credit card let alone a home loan, with the 'great Australian dream' of home ownership seeming unattainable.

This article uses ABS Survey of Income and Housing (SIH) data to compare average levels of selected forms of debt held by various types of households in 2011-12. For analysis of how the overall level of household debt has changed over recent decades, see the companion article Trends in household debt. For information about how the different types of debt held by households have changed over time, see the companion article What types of debts do households have?.


HOW COMMON IS HOUSEHOLD DEBT?

Between 2003-04 and 2011-12, more than 70% of Australian households had some type of debt such as a home loan, money owing on a credit card, vehicle finance, overdue bills or business debt. While Australian households are generally not strangers to debt, they're very unlikely to owe more than they own (only 1% did between 2003-04 and 2011-12).
DO THE WEALTHIEST HOUSEHOLDS CARRY THE LEAST DEBT?

Wealth can give a household the ability to acquire and manage debt. In 2011-12, the average wealth of households in the 20% of households with the least wealth was $31,000. This was much lower than in other household quintiles. The average wealth in the next (second) quintile was $191,000, six times higher than in the lowest quintile. At the other end of the scale, the average wealth of households in the highest wealth quintile was $2,215,000.²

Levels of study loan debt and consumption debt (i.e. credit card debt, vehicle loan debt and other consumption loan debt) varied little between household wealth quintiles in 2011-12. In contrast, households in the lowest wealth quintile tended to have little home loan debt, other property loan debt and investment loan debt whereas households in the highest wealth quintile tended to carry a substantial amount of such investment related debt.


In 2011-12, only 4% of households in the lowest household wealth quintile owned their home with a mortgage, which largely explains the relatively low average level of home loan debt among these households at that time ($11,200). The proportion of households who owned their home with a mortgage was considerably higher among wealthier households, ranging from 36% in the highest household wealth quintile to 53% in the third quintile.²

For other social, economic and demographic characteristics of households in the five household wealth quintiles, see Household Wealth and Wealth Distribution, Australia, 2011-12 (ABS cat.no. 6554.0).
ARE LOW INCOME HOUSEHOLDS HEAVILY IN DEBT?

A household's ability to borrow money depends to a large extent on its ability to repay the debt by either selling assets or generating sufficient income to make required debt repayments. In 2011-12, there was a stronger relationship between income (gross household income) and home loan debt than there was between wealth and home loan debt. For each type of household debt collected in the ABS Survey of Income and Housing, the higher a household's income the more it tended to owe.

In 2011-12, the average household income of households in the lowest quintile was $393 per week. This was half that of the second quintile ($857 per week) and less than one tenth of the average income of those in the highest quintile ($4,297 per week).²


Income can be received from a wide range of sources, such as wages, salaries, dividends, rent, interest, and government pensions and allowances. In 2011-12, the main source of household income for nearly two-thirds of Australian households was income from employment (i.e. wages, salaries or own unincorporated business income).¹ These households tended to have higher debt levels than other households. Households whose main source of household income was income support payments from government had particularly low levels of debt.


RELATIONSHIP BETWEEN EMPLOYMENT AND DEBT

Households who had at least two employed members aged 15 years or older had higher average debt levels than households who had only one employed member aged 15 years or older. Households with no employed members aged 15 years or older had relatively little debt.


DO WE BORROW WHEN YOUNG AND REPAY BEFORE RETIREMENT?

People generally incur and repay various forms of debt at different stages of their life. For example, in 2011-12, young households (i.e. those with a reference person aged 15-24 years) tended to have relatively high levels of study loan debt and vehicle loan debt, and relatively low levels of other property loan debt.


Households generally take on home loan debt before other property loan debt. In 2011-12, the amount owed on home loans peaked among households with a 35-44 year old reference person before progressively declining with advancing age. Other property loan debt and investment loan debt was most prominent among middle aged and pre-retirement aged households (i.e. those with a reference person aged 35-64 years).

Older households were much more likely than younger households to own their home outright in 2011-12.² They also had larger reserves of assets that could have been converted to cash quickly with minimal transaction costs (e.g. money in accounts held with financial institutions, company shares listed on a stock exchange, units owned in a public trust, bills of exchange, and bonds).² Possibly having less need, desire and ability to borrow money, households with a 65-74 year old reference person had comparatively low levels of most forms of debt, while the oldest households (reference person aged 75 years or older) appeared closest to living debt free.
HOW LONG DO HOUSEHOLDS STAY HEAVILY IN DEBT?

The preceding snapshot of debt levels at different stages in life suggests that high debt levels are rarely experienced throughout a person's lifetime. Data from the longitudinal Household, Income and Labour Dynamics in Australia (HILDA) Survey confirm that households who are heavily indebted at a given point in time tend to reduce their debt levels over ensuing years. The HILDA survey found that only 9% of Australian households who had debts greater than three quarters of the value of their assets in 2002 still had debts greater than three quarters of the value of their assets in 2010. The survey also revealed that barely one in five Australian households who had debts equivalent to more than four times their annual income in 2002 still had debts equivalent to more than four times their annual income in 2010.³
CONCLUSION

This analysis of the distribution of household debt in Australia suggests that households with relatively high levels of debt generally receive relatively high income, are of prime working age with future earning capacity, and/or have sufficient assets they could sell to repay debt. The analysis also indicates that the amount of debt owed rises and falls as people age, to the point where older people carry relatively small amounts of debt.

DATA SOURCES AND DEFINITIONS Data presented in this article are mainly from the ABS Survey of Income and Housing (SIH). For comprehensive details about the SIH, including scope and coverage exclusions, survey methodology, and definition of terminology used in its statistical outputs, see Survey of Income and Housing, User Guide, Australia, 2011-12 (ABS cat. no. 6553.0). 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. In 2011-12 around a quarter of all households were people living alone.4 For such single person households, the sole household member is the household reference person. When a household consists of two or more people, the household's reference person is chosen by applying the following selection criteria (in the order listed) to all household members aged 15 or older until a sole member of the household can be selected. the person with the highest housing tenure when ranked as follows: owner without a mortgage, owner with a mortgage, renter, other tenure one of the partners in a registered or de facto marriage, with dependent children one of the partners in a registered or de facto marriage, without dependent children a lone parent with dependent children the person with the highest income the eldest person A household's wealth is the value of its assets less the value of its liabilities. When all households are ranked from lowest to highest according to their level of household wealth, they can then be divided into five equally sized groups called household wealth quintiles. In 2011-12, the average wealth of households in the five household wealth quintiles was $31,000 (lowest), $191,000 (second), $438,000 (third), $766,000 (fourth) and $2,215,000 (highest). 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. 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. Credit card net credit balance is an overall, household level credit balance after all credit card balances of household members have been summed. 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. 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). 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. Investment loan debt is principal outstanding on loans taken out for the purpose of financing investment, excluding loans for business purposes and rental property. 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. Gross household income is income received by all household members from all sources, whether monetary or in kind, before income tax, the Medicare levy and the Medicare levy surcharge are deducted. When all households are ranked from lowest to highest according to their level of gross household income, they can then be divided into five equally sized groups called gross household income quintiles. In 2011-12, the average gross weekly household income of households in the five gross household income quintiles was $393 (lowest), $857 (second), $1,450 (third), $2,240 (fourth) and $4,297 (highest). Own unincorporated business income is income from a business in which the owner(s) and the business are the same legal entity, so that, for example, the owner(s) are personally liable for any business debts that are incurred. For a broad overview of the key concepts and data sources for measuring household economic wellbeing, see the following documents. Fact sheet 1. What is household economic wellbeing? (ABS cat. no. 6523.0) Fact sheet 2. Understanding measures of income and wealth (ABS cat. no. 6523.0) Fact sheet 3. Low economic resource households (ABS cat. no. 6523.0) Fact sheet 4. Key data sources (ABS cat. no. 6523.0) Fact sheet 5. Changes over time (ABS cat. no. 6523.0) Back to top

ENDNOTES

1. Australian Bureau of Statistics 2013 Household Income and Income Distribution, Australia, 2011-12 (cat. no. 6523.0) <www.abs.gov.au>
2. Australian Bureau of Statistics 2013 Household Wealth and Wealth Distribution, Australia, 2011-12 (cat. no. 6554.0) <www.abs.gov.au>
3. Melbourne Institute of Applied Economic and Social Research 2013 Families, Incomes and Jobs, Volume 8: A Statistical Report on Waves 1 to 10 of the Household, Income and Labour Dynamics in Australia Survey <www.melbourneinstitute.com/hilda>
4. Australian Bureau of Statistics 2013 Housing Occupancy and Costs, Australia, 2011-12 (cat. no. 4130.0) <www.abs.gov.au>