Australian Household Debt -A Juggling Act!

Australians’ love affair with debt has developed to the point where we are now spending more than we earn, according to the latest AMP.NATSEM Income and Wealth Report released in December.

According to the Report called, Debt in Australia, the average Australian household spends 2.3 per cent more each week than income coming in.
The report also found household savings had declined steadily in Australia since the 1960s and 1970s when the ratio of net saving to disposable income (household savings ratio) was generally above 10 per cent.

Since then all forms of debt have steadily increased to the point where savings are in the negative. By 2002 Australian households owed an estimated total of $431 billion – representing just under 60 per cent of all economic activity in Australia.

In 2002, an estimated $279.4 billion was outstanding on home mortgages; $85.4 billion was outstanding on other property loans; personal loans (for travel, cars, etc) reached $49.9 billion; the total HECS debt was $9.1 billion and credit card debt amounted to $7.3 billion.

AMP Financial Services Managing Director, Craig Dunn, says while the figures sound large the total debt of the average household is around 1.3 times their average income after paying income tax.

Dunn says as long as sickness or unemployment doesn’t strike, most households should be able to cope.

The research suggests most households work to manage their debt responsibly, notwithstanding the significant increase in debt levels.

However Craig Dunn says for the average Australian household, debt management is still very much a careful balancing act and financial resources are often stretched to their limit.

He says people in this position should consider whether it is wise to walk this financial tightrope without a safety net in place in case of a rise in interest rates, redundancy, illness or any eventuality that could mean they are not able to meet their financial obligations.

The research also raises the question of whether too many Australian families are over investing in their homes and other residential property, perhaps at the expense of a more diverse and well- balanced investment strategy.

According to Professor Ann Harding, Director of the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra and co-author of the report, another factor that should be taken into account in determining whether Australia can manage its debt is the profile of debt accumulation across the population.

Prof Harding says that on the face of it, we should be able to cope as levels of debt are not spread evenly across the adult population.

She says while two thirds of households in Australia (64.5 per cent) have some form of debt, those households with higher levels of debt are on average also best positioned to service it.

Households headed by 35 to 44 year-olds have the highest level of debt at just under $95,000 as they make the transition to home ownership. In households headed by those aged 45 and above, debt begins to fall as households pay off their debt and begin to prepare for retirement. The average debt of households headed by Australians aged 65 and over is very low at only $5,600 a year.

High-income households generally have much higher debt levels than low-income households. Households whose total income exceeded $100,000 a year had an average debt of $143,000. This compares to an average debt of only $9,700 for households with incomes up to $20,000 a year.

The home mortgage remains the key source of debt for Australian households, amounting to about 60 to 70 per cent of total debt right across the income spectrum.

Even if increasing wages are taken into consideration, home mortgage debt has increased significantly in the last decade. The average home mortgage for owner-occupation taken out in August 2004 was $205,600, more than double the average mortgage a decade before in 1994 of $91,200.

In 1994 the average home loan represented 2.8 years of full-time wages whereas in 2004 the average mortgage represents 4.2 years of wages.
This means that the average full-time worker buying a home in 2004 is taking on a debt that is 50 per cent greater than the average worker’s mortgage debt in 1994.

Australians are also spending more on property: $10.5 billion was committed to housing and renovation loans in August 2004, over double the $4.1 billion committed 10 years earlier. Loans for residential property investment have quadrupled over the same period (from $1.3 billion to $5.6 billion).

This tremendous growth in investment loans has resulted in the proportion of housing loans being used for investment purposes rising from one-quarter of all loans in 1994 to more than one-third in August this year.

In Australia 8.8 million people have a credit card and use it at least monthly (61 per cent of the adult population).

The research says only one third of those aged 18 to 24 have a credit card. Individuals most likely to own a credit card are 35 to 54 years old, while almost three out of four have a credit card and use it at least monthly.

Overall the research found that most Australians use their credit card sensibly. More than half (56 per cent) of those who have a credit card pay off the entire balance every month.

Those with the best record of paying off their credit card are men and older Australians although women also have a good record: 57 per cent of men always pay off their credit card compared with 54 per cent of women.

Households earning over $80,000 are more likely than any other group to owe more than $10,000.

Personal loans for purposes such as travel and household goods has increased significantly from 18 per cent in 1994 to 26 per cent in 2004.
The very young (18 to 24 year olds) and mature Australians aged 55 and over are much more likely to accrue this sort of debt than those in their peak working years.

Women are more likely than men to have a HECS debt. Over one-third of women aged 18-24 have a HECS debt, in comparison with only one-quarter of men of the same age.

You can download the full AMP report from www.www.amp.com.au/ampnatsemreports.