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4102.0 - Australian Social Trends, 2002  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 09/05/2002   
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Contents >> Income and Expenditure >> Expenditure: Household debt in the 1990s

Expenditure: Household debt in the 1990s

In 1998-99, almost half (46%) of all Australian households were repaying one or more loans on owner-occupied housing or consumption spending on such things as cars, holidays, household and personal items. The amount of principal outstanding on these loans averaged $57,000 per household.

Borrowing and lending are intrinsic to our economy and way of life. At any given time most households are either borrowers (e.g. repaying loans for housing or other large purchases) or lenders (e.g. via interest bearing cash deposits, stocks or bonds). Many households are both lenders and borrowers at the same time, though the balance between the two varies considerably over life stages.

Household debt is not, in itself, a cause for concern. Incurring a debt presents opportunities as well as risks. For example, people can borrow money to buy a house and enjoy the benefits of living in their own home while repaying the loan, rather than saving for a substantial part of their working lives to buy a home outright in later years.

However, household debt increased rapidly during the 1990s, more rapidly than household incomes.1 This reflected rapid growth in both the numbers of households borrowing money and the average amounts borrowed. The growth in household borrowing was largely driven by falling interest rates, increased competition between lenders, and rising house prices in some areas.

The bulk of household borrowing is associated with the acquisition of assets, mainly the family home, so the increase in household debt during the 1990s was accompanied by an increase in the value of household assets. At the same time, falling interest rates contributed to a decline in the proportion of household income needed to service household debt. Even so, questions remain about whether households are over-committing themselves and whether they could continue to service current levels of debt should interest rates rise rapidly.


Household debt
This article draws on data from the ABS 1998-99 Household Expenditure Survey to examine several measures related to household debt. These include the average amount of principal outstanding on household loans (for owner-occupied housing and consumption) and average interest payments on household loans and credit card accounts.

The principal outstanding on household loans for owner-occupied housing and consumption comprises the bulk of household debt and is the primary measure used in this article to analyse household debt through life-cycle stages. For any group of households with loans, the outstanding loan principal to income ratio is the average amount of principal outstanding on household loans expressed as a proportion of the average annual household income of the group.

Household loans are monies advanced to a household borrower to be repaid at a later date, usually with interest. Loans from any type of creditor including banks, finance companies, government departments, friends, relatives and others are included, as are hire purchase, lease/purchase arrangements and revolving credit facilities (except credit cards which are excluded). Loans for business or investment purposes are excluded.

Weekly household income is the sum of each household member's usual weekly income from all sources (before deductions for income tax or any other purposes). Children's income is included. Annual household income is derived by multiplying weekly household income by 52.


Household loans
In 1998-99, almost a half (46%) of Australian households were repaying one or more loans on owner-occupied housing or consumption spending on such things as cars, holidays, and household or personal items. The amount of principal outstanding on these loans averaged $57,000 per household, about the same as the average gross annual household income for all households with loans. The most common purpose of household loans was to buy or build a home. Over half of all households with loans reported this as the main purpose of one or more of their loans. The principal outstanding on these home loans averaged $77,400 per household and accounted for 79% of the total principal outstanding on all household loans. The second most common purpose of household loans was to buy a motor vehicle but the principal outstanding on such loans (averaging $12,500 per household) accounted for only 8% of the total principal outstanding on all household loans.

HOUSEHOLDS WITH ONE OR MORE LOANS - 1998-99

Number
Proportion
Average principal outstanding(a)
Main purpose of loan(s)
‘000
%
$‘000

Buy/build home
1,922.5
27.0
77.4
Alterations/additions to home
196.3
2.8
25.3
Buy/build other property
185.9
2.6
71.7
Alterations/additions to other property
27.0
0.4
24.7
Motor vehicle(s)
1,243.9
17.5
12.5
Holiday(s)
59.4
0.8
10.4
Other purposes
661.4
9.3
6.9
Total households with loan(s)(b)
3,296.4
46.3
57.2
Total households
7,122.8
100.0
. .

(a) For each purpose, the average amount of principal outstanding on loans mainly for that purpose per household with one or more loans for that purpose.
(b) Some households had more than one type of loan and therefore components do not add to total.

Source: ABS 1998-99 Household Expenditure Survey.


The proportion of households with loans in 1998-99, and the average amount of principal outstanding, varied across life-cycle groups. This was largely a reflection of home buying patterns through life-cycle stages (see Australian Social Trends 2001, Housing experience through life-cycle stages).

Half of all young lone-person households (reference person aged under 35 years) had loans. The average amount owed by this group ($46,000) was considerably less than the national average, reflecting relatively low home buying rates for this group. Among the prime home buying groups, i.e. young couple-only households and couples with young children (eldest aged under 5 years), the proportion of households with loans reached 73% and 76% respectively and the principal outstanding on these loans averaged just over $75,000. The proportion of households with loans, and the average amount outstanding, then declined steadily among subsequent life-cycle groups as home mortgages were reduced or discharged altogether. However, among one-parent households with dependant children, the relatively low proportion of households with loans (46%) and relatively low average amount of principal outstanding on these loans ($43,000) was associated with low rates of home ownership rather than with the advanced levels of loan repayment and high rates of outright home ownership characteristic of older households.

PROPORTION OF HOUSEHOLDS WITH LOAN(S) - 1998-99

Source: ABS 1998-99 Household Expenditure Survey.


In relation to their average annual incomes, younger households owed more than older households. In the case of young couple-only households and couples with younger children (the eldest aged under 15 years), relatively high outstanding loan principal to income ratios of between 1.1 and 1.3 were associated with relatively high levels of principal outstanding on household loans (averaging over $70,000) and relatively high average incomes. While one-parent households with dependent children and young lone-person households owed a little over half as much, their relatively low incomes meant that they still had above average loan principal to income ratios of 1.2. Older lone-person and couple-only households (reference person aged 65 years or over) had by far the lowest average principal outstanding on household loans ($9,800) but this nonetheless represented over half (0.6) of the average annual income for this group.

Interest payments on household loans varied across life-cycle groups reflecting differences in the amounts of principal still owing on their loans. In 1998-99, young couple-only households and couples with young children (the eldest aged under 15 years) had the highest interest payments, averaging more than $90 per week. Average weekly interest payments then declined steadily across the older life-cycle groups. Older lone-person and couple-only households (reference person aged 65 years or over) had the lowest interest payments on household loans, averaging $13 per week.

PRINCIPAL OUTSTANDING AND INTEREST PAYMENTS ON HOUSEHOLD LOANS - 1998-99

Average principal outstanding on loans(a)
Outstanding loan principal to income ratio
Average weekly interest on loans(b)
Selected life-cycle groups
$'000
ratio
$

Lone person, aged under 35 years
45.6
1.2
63.50
Couple only, reference person aged under 35 years
75.9
1.1
102.00
Couple, eldest child aged under 5 years
75.2
1.3
99.20
Couple, eldest child aged 5-14 years
71.8
1.2
92.00
Couple, eldest child aged 15 years or over
53.2
0.7
70.70
One parent with dependant children
43.0
1.2
57.00
Couple only, reference person aged 55-64 years
31.9
0.8
44.10
Lone person or couple only, reference person aged 65 years or over
9.8
0.6
13.30
All households(c)
57.2
1.0
78.40

(a) For each life-cycle group, the average amount of principal outstanding on loans per household with one or more loans.
(b) Average weekly interest payments for households with one or more loans.
(c) Includes life-cycle groups not defined above.

Source: ABS 1998-99 Household Expenditure Survey.


Credit card use
More people are using credit cards more often. Two-thirds (66%) of Australian households had one or more credit cards in current use in 1998-99, compared with 59% in 1988-89. Reserve Bank of Australia statistics on bank-issued credit cards show that the number of transactions per account per month increased from 2.9 in 1994-95 to 6.6 in 2000-2001.2

Credit card use varies across life-cycle groups. In 1998-99, couple households (with or without children) were more likely than one adult households (one-parent or lone-person households) to have one or more credit cards in current use. Within these two groups,younger households were generally more likely than their older counterparts to have credit cards.

The Household Expenditure Survey did not collect any data on the amount of credit used on credit card accounts each month. However, it is possible to estimate the average amount of credit card debt that households carried over from one month to the next. Based on an average weekly expenditure of $7 on credit card interest, and on average annual credit card interest rates of around 15% during 1998-991, the average credit card debt carried over was about $580 per household.


Credit cards
Credit cards are any type of charge account with credit cards that are in current use. Included are credit cards offered by stores, petrol companies, etc. as well as those issued by banks and credit card agencies. Any form of charge account which does not use a credit card is excluded (e.g. bank overdrafts or monthly accounts with specific traders such as newsagents or milk vendors). Also excluded are any credit cards or accounts not used in the past 12 months, or used solely for business or investment purposes. Debit cards and smart cards are also excluded.


Just over a third (36%) of all households with credit cards in current use in 1998-99, incurred interest on their credit card accounts. Young couple-only households and couples with dependent children were the most likely to have credit card interest (around 47%). Older lone-person and couple-only households were the least likely to have credit card interest (12%). Average weekly interest payments on credit card accounts ranged from $5 for older lone-person and couple-only households to $9 for couples with older children.

Despite the increased use of credit cards during the 1990s, there was little change in the proportion of households that incurred interest on their credit card accounts - 34% in 1988-89 and 36% in 1998-99. The proportion of weekly household income that these households paid in credit card interest also remained about the same (0.7%) even though the decline in credit card interest rates was less than on other household loan products.1

This suggests that people are increasingly using their credit cards as an alternative to cash or cheques to make payments, rather than for longer-term finance. Incentives such as reward schemes and the convenience of being able to make payments by phone or over the Internet may have contributed to the increased use of credit cards.1

HOUSEHOLDS WITH CREDIT CARDS IN CURRENT USE AND CREDIT CARD INTEREST PAYMENTS - 1998-99

Proportion of households:

With credit cards in current use
With credit card interest
Average weekly credit card interest(a)
Selected life-cycle groups
%
%
$

Lone person, aged under 35 years
59.8
33.8
6.00
Couple only, reference person aged under 35 years
77.7
48.3
7.40
Couple, eldest child aged under 5 years
75.0
47.0
6.10
Couple, eldest child aged 5-14 years
77.5
47.0
7.00
Couple, eldest child aged 15 years or over
78.2
45.0
8.90
One parent with dependent children
46.2
31.1
6.10
Couple only, reference person aged 55-64 years
68.4
31.2
6.20
Lone person or couple only, reference person aged 65 years or over
46.2
11.8
4.80
All households(b)
65.7
35.6
7.30

(a) Average weekly interest payments for households which incurred credit card interest.
(b) Includes life-cycle groups not defined above.

Source: ABS 1998-99 Household Expenditure Survey.


Total interest payments on loans and credit cards
Average weekly total interest payments (on household loans and credit cards combined) differed widely across life-cycle groups, from $9 for older lone-person and couple-only households to more than $90 for young couple-only households and couples with young children (the eldest aged under 5 years). The distribution of total interest payments basically mirrored the distribution of interest on household loans, which was by far the largest component of total interest payments in all life-cycle groups.

The proportion of household income spent on interest payments also varied across life-cycle groups, ranging from 7% to 9% of the average weekly incomes of younger households (including one-parent households with dependent children) and from 2% to 4% of the average weekly incomes of older households.

Overall, households allocated 6% of their average weekly incomes to interest payments in 1998-99. Despite the fact that the average size of new loans grew faster than average household incomes during the 1990s (see Australian Social Trends 2001, Housing finance), this was considerably less than the 9% of average household income allocated to interest payments 10 years earlier in 1988-89. This was largely due to the sharp decline in interest rates on home loans and secured personal finance during the period.1

TOTAL INTEREST PAYMENTS ON LOANS AND/OR CREDIT CARDS - 1998-99

Average weekly payments(a)
Proportion of income(b)
Selected life-cycle groups
$
%

Lone person, aged under 35 years
51.30
7.6
Couple only, reference person aged under 35 years
91.40
7.3
Couple, eldest child aged under 5 years
92.70
8.7
Couple, eldest child aged 5-14 years
86.00
7.6
Couple, eldest child aged 15 years or over
62.30
4.3
Lone parent with dependant children
46.50
7.3
Couple only, reference person aged 55-64 years
27.70
3.7
Lone person or couple only, reference person aged 65 years or over
8.60
2.3
All households with interest payments(c)
65.30
6.1

(a) Average weekly interest payments for households with household loans and/or credit card interest.
(b) Average weekly household income of households with household loans and/or credit card interest.
(c) Includes life-cycle groups not defined above.

Source: ABS 1998-99 Household Expenditure Survey.


Endnotes
1 Reserve Bank of Australia 1999, 'Consumer credit and household finances' in RBA Bulletin, June 1999, pp. 11-17.

2 Reserve Bank of Australia 2001, RBA Bulletin, December 2001 and June 1998.



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