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This document was added 03/02/2007.



FEATURE ARTICLE: HOUSEHOLD SECTOR BALANCE SHEET – A NATIONAL ACCOUNTS' PERSPECTIVE


INTRODUCTION

1. The Australian National Accounts (ANA) provide a complete and integrated set of macroeconomic accounts of the Australian economy based on consistent concepts, definitions, classifications and accounting rules. This article summarises the data published for the household sector by the ABS in the financial accounts, and the national accounts more generally, and derives some analytical measures by combining data from the household balance sheet with income and interest measures and counts of households. It seeks to provide summary data and to highlight the structural changes that have occurred in the household sector balance sheet over this time.

2. In analysing the household sector balance sheet, no single measure provides a complete picture. The various components of the balance sheet need to be examined without undue focus on any particular component. This is the approach taken in this article. Likewise, no single ratio can completely capture the 'health' of the household sector balance sheet and a range of ratios, as such those presented in this article should be used.

NATIONAL ACCOUNTING PERSPECTIVE OF THE HOUSEHOLD SECTOR

3. Australia's national accounts statistics are compiled on a quarterly and annual basis, in accordance with international standards contained in the System of National Accounts, 1993 (SNA93). Economic units are classified into sectors on the basis of their principal functions, behaviour and objectives. There are five major sectors: the Household sector; Non-financial corporations; Financial corporations; General government; and Rest of world. A balance sheet is compiled for each sector.

4. The national accounting definition of the household sector used in the ANA includes persons, unincorporated businesses and non-profit institutions serving households (NPISHs), for example churches, charities, political parties and trade unions. Unincorporated businesses, whose activities are inextricably mixed with personal activities, are extensions of households. NPISHs are included because data are not available to identify their activities separately.

5. The data used in compiling household sector estimates in the national accounts come from a variety of sources which include counterpart data obtained from direct surveys of financial institutions, administrative data, and estimates based on modelling techniques.

6. The national accounting definition and view of the household sector differ from the definition of households used in ABS household surveys. This definition typically defines a household unit in terms of a group of related or unrelated people who usually live in the same dwelling. The national accounting view seeks to measure the transactions between the household sector and other sectors, as well as the household sector's claims on, and liabilities to, the other sectors. Household surveys provide detailed information about characteristics, activities and behaviours of households.

7. The quality of data compiled for the national accounts household sector balance sheet is variable, and depends on the type of instrument and the source of the data.

  • Household sector asset holdings of shares (equity), bonds and other debt securities are derived on a residual basis after all other sectors' holdings of the instruments have been identified. These data are of mixed quality, given the residual includes the accumulation of errors and omissions in the other holdings and, in some cases, a lack of data requires estimates to be made.
  • Life insurance and superannuation funds belonging to the household sector (insurance technical reserves) are compiled from data sourced from the Australian Prudential Regulation Authority (APRA) surveys of superannuation funds, ABS surveys of life insurance corporations and fund managers, and Australian Tax Office (ATO) data for self-managed superannuation funds. While good quality data are available, the measurement of insurance technical reserves is not straightforward. This is because investments are made in stages. Firstly, funds flow from a large number of small personal superannuation and other accounts to institutions. These institutions then invest the funds directly and indirectly through various "retail" and "wholesale" methods of accumulating funds into large pools for management purposes. Nevertheless, the ABS believes the stock data to be of a reasonable quality. See the feature article entitled Insurance Technical Reserves: Sources and Methods in the March quarter 2001 issue of Australian National Accounts, Financial Accounts (cat. no. 5232.0) for the methodology used in estimating insurance technical reserves.
  • Real estate assets of the household sector are calculated as part of the compilation of the annual Australian System of National Accounts (cat no. 5204.0). Values for residential, rural and commercial land and dwellings are available. See the feature article Valuing Land and Dwellings Owned by Households in the 2005-06 issue for a description of the sources and methods, including recent improvements. The ABS believes the aggregates produced are of reasonable quality.
  • Household sector liability data (particularly loans) and deposit and loan assets are sourced primarily from information provided by financial institutions to the APRA and the ABS, and are considered to be of good quality.

8. Overall the ABS believes the data for the household sector are of sufficient quality to provide a useful analysis of its financial position. The End Notes provide more detailed information of data sources and data limitations.



HOUSEHOLD SECTOR BALANCE SHEET

9. The household sector net worth position (assets minus liabilities) increased from a net asset position of $1,350.4b at 30 June 1991 to $4,424.2b at 30 June 2006, an average annual growth rate of 8%.


Household sector assets

10. At 30 June 2006, the household sector had total assets worth $5,440.8b, up from $1,545.0b at 30 June 1991, an average annual growth rate of 9%. During that time the composition of household assets has changed. The value of real estate assets grew significantly over the fifteen years due to the increase in housing prices, particularly in the capital cities. The value of insurance technical reserve assets, which include superannuation fund reserves, grew markedly due to mandatory superannuation introduced in 1992, as well as from capital gains from investing primarily in a buoyant share market. There was also growth in household sector holdings of equity, driven by households acquiring equity when a number of large government business enterprises were privatised; through demutualisations and flotation on the stock exchange of a number of insurance cooperatives, and through more active participation in the share market generally. The growth of household sector assets is summarised in Graph 1 below.

Graph 1: Household sector assets by type
Graph 1: Household sector assets by type



11. An alternative view of household sector assets is provided in Table 1. It considers the value of liquid and illiquid assets as a proportion of total assets. Viewing the balance sheet by broad liquidity characteristics gives an insight into the household sector's ability to reduce debt in a time of crisis. Liquid assets are those which can be converted to cash quickly and with minimal capital loss, for example holdings of deposits, equity and securities. Illiquid assets comprise insurance technical reserves, which are not available for the most part until retirement age, residential real estate, and other illiquid assets such as accounts receivable and non-residential land and structures. The value of both liquid and illiquid assets grew significantly over time, with illiquid assets increasing marginally as a proportion of total assets.

TABLE 1: HOUSEHOLD SECTOR ASSETS

LIQUID ASSETS
ILLIQUID ASSETS
ASSETS



Deposits
Equities
Other
liquid
assets(a)
Total
% of
total
assets
Insurance
Technical
reserves
Residential
real
estate(b)
Other
Illiquid
assets(c)
Total
% of
total
assets
Total
$b
$b
$b
$b
%
$b
$b
$b
$b
%
$b

As at 30 June

1991
157.8
57.4
24.3
239.5
15.5
272.7
800.7
232.1
1 305.5
84.5
1 545.0
1992
163.0
63.9
26.6
253.5
15.8
299.9
831.6
223.2
1 354.7
84.2
1 608.2
1993
168.5
80.1
23.8
272.4
16.2
321.9
858.5
230.9
1 411.2
83.8
1 683.6
1994
181.3
104.6
22.9
308.7
17.0
345.2
923.8
238.8
1 507.8
83.0
1 816.5
1995
186.8
100.1
24.9
311.8
16.2
375.6
993.9
245.0
1 614.6
83.8
1 926.4
1996
200.1
97.8
27.3
325.2
16.1
414.2
1 021.9
260.3
1 696.4
83.9
2 021.6
1997
213.6
134.3
29.8
377.8
16.9
467.5
1 113.6
272.3
1 853.4
83.1
2 231.2
1998
224.4
152.7
31.2
408.3
16.8
499.6
1 244.9
277.3
2 021.8
83.2
2 430.1
1999
235.1
195.8
31.3
462.2
17.4
547.9
1 350.8
294.3
2 193.0
82.6
2 655.2
2000
245.3
201.6
29.8
476.7
16.4
623.7
1 501.6
312.1
2 437.5
83.6
2 914.2
2001
262.8
255.4
28.8
546.9
17.2
656.6
1 643.8
327.3
2 627.7
82.8
3 174.6
2002
286.6
254.5
27.9
569.0
16.0
688.8
1 937.4
353.4
2 979.6
84.0
3 548.6
2003
319.9
228.5
29.4
577.8
14.7
735.4
2 220.9
388.7
3 345.0
85.3
3 922.8
2004
350.9
262.7
32.1
645.7
14.4
835.8
2 580.3
434.7
3 850.8
85.6
4 496.5
2005
377.2
313.8
34.5
725.4
14.8
958.7
2 721.5
480.4
4 160.6
85.2
4 886.0
2006
407.0
374.2
38.0
819.2
15.1
1 121.6
2 939.6
560.4
4 621.6
84.9
5 440.8

Average Annual Growth Rate (%)

1991-2006
7
13
3
9
. .
10
9
6
9
. .
9

. . not applicable
(a) Includes holdings of bills of exchange, one name paper and bonds.
(b) The real estate aggregate represents the value for residential land and dwellings as calculated in the Australian System of National Accounts (cat. no. 5204.0).
(c) Includes accounts receivable and other non-financial assets, such as non-residential land and structures.

Household sector liabilities

12. Household sector liabilities are classified by the instrument of incurrence, namely borrowings in the form of debt securities, loans, and accounts payable. Accounts payable arise from obligations such as amounts owing for provision of goods and services, or from legal obligations such as taxation, and do not result from borrowing. The Reserve Bank of Australia (RBA) credit aggregates (Table D2 of the RBA Bulletin) and ABS credit aggregates (Tables 1 and 17 of the Financial Accounts) concentrate on debt in the form of borrowings only. However the national accounts definition of debt is broader than borrowings and includes all financial instruments except equity.

13. Table 2 shows that at 30 June 2006, 70% ($707.8b) of household sector liabilities were borrowings from banks, and 19% ($188.4b) were borrowings from financial intermediaries n.e.c.. Borrowings from financial intermediaries n.e.c., was attributable to securitisation programs to finance mortgage borrowing. See paragraph 17 for further detail.

TABLE 2: HOUSEHOLD SECTOR LIABILITIES

LOANS

Bills of exchange
Banks
Other
depository
corporations
Financial intermediaries n.e.c.(a)
National
general
government
Other
Total
Accounts
payable
Total liabilities
$b
$b
$b
$b
$b
$b
$b
$b
$b

As at 30 June

1991
6.6
121.7
45.1
11.5
1.1
6.1
185.5
2.5
194.6
1992
6.7
127.5
44.3
12.2
1.7
6.1
191.9
2.4
200.9
1993
6.1
142.6
38.3
11.3
2.3
5.4
200.0
2.5
208.6
1994
6.3
168.9
40.4
10.5
2.9
4.9
227.6
2.7
236.6
1995
6.2
188.5
45.7
11.6
3.4
5.4
254.5
6.2
266.9
1996
6.8
211.1
49.9
15.0
4.0
5.8
285.7
7.3
299.9
1997
6.7
233.0
51.7
20.5
4.5
5.4
315.0
8.6
330.4
1998
7.3
258.4
56.1
30.2
4.9
6.3
356.0
15.4
378.7
1999
7.8
292.0
60.0
36.2
5.4
5.8
399.4
4.7
411.9
2000
8.4
333.6
64.5
49.6
6.2
6.1
460.1
4.8
473.3
2001
8.9
359.8
69.7
59.4
7.2
5.3
501.4
5.2
515.5
2002
8.9
418.2
73.4
76.3
8.1
5.1
581.1
6.4
596.3
2003
10.5
490.6
70.5
92.5
9.1
4.5
667.2
7.2
684.9
2004
12.7
567.9
75.8
127.3
10.2
2.8
783.9
3.2
799.7
2005
15.2
633.4
81.3
157.4
11.5
1.9
885.5
3.9
904.6
2006
17.6
707.8
84.4
188.4
13.0
1.5
995.1
3.9
1 016.6

Average Annual Growth Rate (%)

1991-2006
7
12
4
21
18
-9
12
3
12

(a) This subsector includes financial institutions such as financial public unit trusts, common funds, wholesale trusts, cooperative housing societies, securitisers, fund managers, stockbrokers, etc. For loans to the household sector, securitisers are the main lender.

Graph 2 further illustrates the banks' dominant position in lending to the household sector.

Graph 2: Household sector loans by type of financial institution
Graph 2: Household sector loans by type of financial institution



14. Table 3 and Graph 3 provide information on the type of loans made to the household sector. Loans for mortgages increased as a percentage of total household sector loans, from 54% at 30 June 1991 to 77% at 30 June 2006. The other loans category, whose share decreased from 46% at 30 June 1991 to 23% at 30 June 2006, is comprised of personal, credit card and national general government loans.

TABLE 3: HOUSEHOLD SECTOR MORTGAGE AND OTHER LOANS

MORTGAGE
OTHER


Value
Percent of total loans
Value
Percent of total loans
Total loans
$b
%
$b
%
$b

As at 30 June

1991
100.2
54
85.3
46
185.5
1992
109.6
57
82.2
43
191.9
1993
123.9
62
76.1
38
200.0
1994
148.2
65
79.4
35
227.6
1995
171.0
67
83.5
33
254.5
1996
190.5
67
95.3
33
285.7
1997
211.3
67
103.7
33
315.0
1998
235.9
66
120.1
34
356.0
1999
266.3
67
133.1
33
399.4
2000
308.7
67
151.4
33
460.1
2001
354.1
71
147.3
29
501.4
2002
419.5
72
161.5
28
581.1
2003
499.5
75
167.7
25
667.2
2004
601.7
77
182.2
23
783.9
2005
678.3
77
207.2
23
885.5
2006
764.1
77
230.9
23
995.1

Average Annual Growth Rate (%)

1991-2006
15
. .
7
. .
12

. . not applicable

Graph 3: Household sector loans by type of loan
Graph 3: Household sector loans by type of loan



15. Table 4 provides more detailed data on liabilities of the household sector. These data are available only from 30 June 2002 following implementation of revised reporting arrangements with financial institutions. It indicates the decrease in non-mortgage loans as a proportion of total liabilities is primarily due to personal loans and loans to unincorporated businesses decreasing as a proportion of total liabilities. Household sector credit card and national general government debt continued to grow steadily, but showed no change as a proportion of total liabilities. The proportional decrease in other personal loans and loans to unincorporated businesses may reflect both increased borrowing for housing and product innovation, whereby households were able to combine smaller personal loans into larger mortgage loans to benefit from lower interest rates.

TABLE 4: HOUSEHOLD SECTOR LIABILITIES BY SUBSECTOR

JUN 2002
JUN 2003
JUN 2004
JUN 2005
JUN 2006





$b
%
$b
%
$b
%
$b
%
$b
%

Household sector liabilities
596.3
100
684.9
100
799.7
100
904.6
100
1 016.6
100
Persons
540.1
91
628.2
92
736.2
92
835.3
92
939.7
92
Mortgage loans
419.5
70
499.5
73
601.7
75
678.3
75
764.1
75
National general government loans
8.1
1
9.1
1
10.2
1
11.5
1
13.0
1
Credit cards
18.9
3
20.8
3
23.3
3
26.0
3
29.4
3
Other personal loans
87.2
15
91.6
13
97.8
12
115.6
13
129.2
12
Other accounts payable
6.4
1
7.2
1
3.2
-
3.9
-
3.9
-
Unincorporated businesses & NPISHs(a)
56.2
9
56.7
8
63.5
8
69.2
8
77.0
8
Loans(b)
47.3
8
46.2
7
50.9
6
54.0
6
59.4
6
Bills of exchange
8.9
1
10.5
2
12.7
2
15.2
2
17.6
2

- nil or rounded to zero (including null cells)
(a) Non-profit institutions serving households.
(b) This item is derived as a residual.

16. The growth in mortgage loans was due to factors affecting both demand and supply. On the demand side, the average mortgage loan size increased markedly in response to an increase in housing prices, particularly in capital cities. Mortgage loans included loans for owner occupied housing and for investment housing. Commitments for investment housing grew over the 15 year period, up from the 19% of mortgage loan commitments in 1991 to 30% in 2006 (source: Table 11, Housing Finance Australia (cat. no. 5609.0)). Incentives offered by the Federal and State and Territory Governments in the form of the First Home Owner Scheme and a series of stamp duty concessions for first home buyers increased demand for owner-occupied housing, while borrowing for investment housing was stimulated by tax incentives such as depreciation allowances and lessening of capital gains tax. These incentives coupled with an economic climate of relatively low interest and unemployment rates, contributed to households' willingness to significantly increase their indebtedness. Despite low interest rates (see Table 6 and Graph 5), interest payable as a proportion of household income has risen in recent years (see Graph 4) due to the increase in indebtedness.

17. The growth in the supply of mortgage loans was the result of a combination of innovation in the financial markets and competition between mortgage providers. Specifically,
  • Since 1991, there has been an increase in the types of products available, such as home equity loans, the introduction of fixed and floating rate interest products tailored to borrowers' requirements, and more recently, the introduction of reverse mortgages which allow the use of home equity to boost household income streams. More flexible products include redraw facilities which allow borrowers to top up their loans and have allowed households to use their mortgages for purposes other than owner-occupied housing, such as purchasing investment houses, financial assets such as shares, repaying debt, and for consumption purposes. The RBA recently found that for households that made a net withdrawal of equity during 2004, around two-thirds of the funds were invested in other assets or used to pay down other loans. Only a relatively small proportion of the total net equity withdrawn was used for consumption. (source: Reserve Bank Bulletin, October 2005 issue, pages 1-12).
  • The primary funding innovation affecting the supply of mortgages during this period was securitisation, whereby lending institutions, such as banks, remove mortgages from their balance sheets by selling them to a special purpose vehicle, usually a trust. The purchase by the trust is financed by issuing debt securities. The cash proceeds from the sale can be used by the original lending institution to make additional lending.
  • The growth in securitisation resulted in an increase in the number and type of institutions involved in financing home loans, beyond the traditional banks, building societies and credit unions. The increase in the number and type of institutions also contributed to a greater variety and flexibility of products and increased competition between lenders, which tended to keep interest rates competitive.


AVERAGE ASSETS AND LIABILITIES PER HOUSEHOLD

18. The growth in assets and liabilities on a per household basis has been derived in Table 5 by dividing the household balance sheet data by the number of households from Household and Family Projections Australia (cat. no. 3236.0). This type of analysis has limitations given that the household balance sheet data include unincorporated businesses and non profit institutions serving households (NPISHs). Unincorporated businesses, whose activities are inextricably mixed with personal activities, are extensions of households, so are effectively included in the number of households given in Table 5. However, NPISHs are separate entities from households and are not included in the number of households. The effect on averages is believed to be small. In addition, the averaging technique does not address liability/asset distribution patterns. However, despite these limitations, these averages offer a broad picture of the incidence of growth in assets and liabilities on a per household basis.

19. At 30 June 2006, average debt per household stood at $126,143, up from $31,524 per household at 30 June 1991, an average annual growth rate of 9%. The average assets per household was $675,188 at June 2006, up from $250,277 at 30 June 1991, an average annual growth rate of 6%. The growth rates in assets and liabilities on a per household basis were lower than the growth in total assets and liabilities as seen in Tables 1 and 2, because the number of households grew at an average annual rate of 2% from 30 June 1991.

TABLE 5: AVERAGE ASSETS AND LIABILITIES PER HOUSEHOLD

LIABILITIES
LIQUID ASSETS
ILLIQUID ASSETS
ASSETS




Number of
house-
holds(a)
Mortgage
loans
Other
debt
Total
debt
Deposits
Equities
Other
Total
Insurance
reserves
Residential
real
estate
Other
Total
Total
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000

As at June 30

1991
6 173 168
16.2
15.3
31.5
25.6
9.3
3.9
38.8
44.2
129.7
37.6
211.5
250.3
1992
6 278 399
17.5
14.5
32.0
26.0
10.2
4.2
40.4
47.8
132.5
35.5
215.8
256.1
1993
6 428 150
19.3
13.2
32.5
26.2
12.5
3.7
42.4
50.1
133.5
35.9
219.5
261.9
1994
6 554 140
22.6
13.5
36.1
27.7
16.0
3.5
47.1
52.7
141.0
36.4
230.1
277.2
1995
6 667 662
25.6
14.4
40.0
28.0
15.0
3.7
46.8
56.3
149.1
36.7
242.1
288.9
1996
6 762 115
28.2
16.2
44.3
29.6
14.5
4.0
48.1
61.3
151.1
38.5
250.9
299.0
1997
6 910 143
30.6
17.2
47.8
30.9
19.4
4.3
54.7
67.7
161.2
39.4
268.2
322.9
1998
7 015 213
33.6
20.3
54.0
32.0
21.8
4.5
58.2
71.2
177.5
39.5
288.2
346.4
1999
7 126 529
37.4
20.4
57.8
33.0
27.5
4.4
64.9
76.9
189.5
41.3
307.7
372.6
2000
7 249 911
42.6
22.7
65.3
33.8
27.8
4.1
65.8
86.0
207.1
43.1
336.2
402.0
2001
7 366 692
48.1
21.9
70.0
35.7
34.7
3.9
74.2
89.1
223.1
44.4
356.7
430.9
2002
7 505 700
55.9
23.6
79.5
38.2
33.9
3.7
75.8
91.8
258.1
47.1
397.0
472.8
2003
7 645 400
65.3
24.3
89.6
41.8
29.9
3.8
75.6
96.2
290.5
50.8
437.5
513.1
2004
7 783 700
77.3
25.4
102.7
45.1
33.8
4.1
83.0
107.4
331.5
55.9
494.7
577.7
2005
7 920 800
85.6
28.6
114.2
47.6
39.6
4.4
91.6
121.0
343.6
60.6
525.3
616.9
2006
8 058 200
94.8
31.3
126.1
50.5
46.4
4.7
101.7
139.2
364.8
69.5
573.5
675.2

Average Annual Growth Rate (%)

1991-2006
2
12
5
9
4
11
1
6
7
7
4
6
6

(a) Sourced from Australian Demographic Statistics (cat. no. 3101.0) and Households and Family Projections Australia (cat. no. 3236.0).


HOUSEHOLD SECTOR FINANCIAL RATIOS

20. Financial ratios, as presented in Table 6A, are derived from balance sheet data and income time series that are readily available from standard ANA releases. They provide useful indicators of the financial health of the household sector in a consistent manner over a time series of 15 years. More information about household wealth and debt characteristics can be found in Household Wealth and Wealth Distribution Australia, 2003-04 (cat. no. 6554.0) and Household Expenditure Survey, Australia, Summary of results, 2003-04 (cat. no. 6530.0). The main benefit of the ratios is to analyse their change over time and not to make a statement about a particular point in time. These measures do not comment on the distribution of liabilities and assets across households, nor the ability of those with debt to meet interest payable obligations.

TABLE 6: SELECTED HOUSEHOLD SECTOR FINANCIAL VALUES

Annual income(a)
Interest payable(b)
Mortgage loans
Total
debt
Total liquid
assets
Residential
real estate
asset
Total assets
Net
worth
$b
$b
$b
$b
$b
$b
$b
$b

As at 30 June

1991
280.1
29.0
100.2
194.6
239.5
800.7
1 545.0
1 350.4
1992
289.1
23.4
109.6
200.9
253.5
831.6
1 608.2
1 407.3
1993
302.4
21.6
123.9
208.6
272.4
858.5
1 683.6
1 475.0
1994
316.7
20.5
148.2
236.6
308.7
923.8
1 816.5
1 579.9
1995
334.8
24.4
171.0
266.9
311.8
993.9
1 926.4
1 659.5
1996
355.8
29.2
190.5
299.9
325.2
1 021.9
2 021.6
1 721.7
1997
369.7
27.3
211.3
330.4
377.8
1 113.6
2 231.2
1 900.8
1998
381.6
28.1
235.9
378.7
408.3
1 244.9
2 430.1
2 051.4
1999
398.7
29.7
266.3
411.9
462.2
1 350.8
2 655.2
2 243.3
2000
421.3
35.3
308.7
473.3
476.7
1 501.6
2 914.2
2 440.9
2001
457.7
38.7
354.1
515.5
546.9
1 643.8
3 174.6
2 659.1
2002
481.2
37.8
419.5
596.3
569.0
1 937.4
3 548.6
2 952.3
2003
495.2
44.5
499.5
684.9
577.8
2 220.9
3 922.8
3 237.9
2004
529.2
54.8
601.7
799.7
645.7
2 580.3
4 496.5
3 696.8
2005
562.9
63.7
678.3
904.6
725.4
2 721.5
4 886.0
3 981.4
2006
599.0
72.8
764.1
1 016.6
819.2
2 939.6
5 440.8
4 424.2

(a) Gross disposal income series from Table 46 of Australian National Accounts (cat. no. 5204.0).
(b) Interest payable is derived by summing "pure" interest paid components for consumer debt, dwelling and unincorporated debt plus financial intermediation services indirectly measured on loans for persons, dwellings and unincorporated businesses.
TABLE 6A: SELECTED HOUSEHOLD SECTOR FINANCIAL RATIOS

Interest payable
to
annual income
Implicit
interest rate(a)
Debt to
annual income
Mortgage debt
to
residential
real estate
asset
Debt
to liquid
assets
Debt
to
assets
Net worth
to
annual
income
%
%
%
%
%
%
%

As at 30 June

1991
10
15
69
13
81
13
482
1992
8
12
69
13
79
12
487
1993
7
11
69
14
77
12
488
1994
6
9
75
16
77
13
499
1995
7
10
80
17
86
14
496
1996
8
10
84
19
92
15
484
1997
7
9
89
19
87
15
514
1998
7
8
99
19
93
16
538
1999
7
8
103
20
89
16
563
2000
8
8
112
21
99
16
579
2001
8
8
113
22
94
16
581
2002
8
7
124
22
105
17
614
2003
9
7
138
22
119
17
654
2004
10
7
151
23
124
18
699
2005
11
7
161
25
125
19
707
2006
12
8
170
26
124
19
739

(a) Implicit interest rate is calculated as interest payable over the average of total debt in that period.

21. In summary, the net worth to annual income ratio increased markedly over the period. This was primarily because of the household sector's building of wealth assets, such as insurance technical reserves, equity and residential real estate. However, in building these wealth assets, the household sector showed a steady increase in gearing (the ratio of debt to assets) and debt to annual income ratios.

22. Detail about seven financial ratios which have been derived from the household sector balance sheet data are as follows:
      1. Interest payable to annual income ratio represents the proportion of annual household sector disposable income which is required to meet interest payments. Interest payable is derived from the national accounts and includes financial intermediation services indirectly measured (FISIM) on loans as well as the 'pure' interest recorded in the national accounts. In 2005-06, interest payable accounted for 12% of total disposable income, up compared to the average of 8% for the 1990's, when the ratio reached a low of 6%. This ratio and the debt to income ratio described below need to be interpreted in light of the increase in assets in the same period. This shows that much of the debt, and hence interest, relates to debt incurred to purchase assets.
Graph 4: Houshold sector interest payable to income ratio
Graph 4: Houshold sector interest payable to income ratio

      2. Implicit average interest rate represents the notional interest rate paid by the household sector on average debt balances for each year. It is calculated by dividing the interest payable per annum by the average debt per annum. The implicit average interest rate, as shown in graph 5, decreased from 15% in 1991 to 8% in 2006.
Graph 5: Implicit average interest rate (% p.a.)
Graph 5: Implicit Average Interest Rate (% p.a.)

      3. Debt to annual income ratio indicates the proportion of annual income needed to repay all debt. At 30 June 1991, household sector debt represented 69% of annual gross disposable income and by 30 June 2006, that percentage had grown to approximately 170%. The increase in the ratio needs to be interpreted in light of the increase in assets over the period, the change in interest rates, the increase in borrowing for investor housing, not shown in the article but available from other sources, and the possibility of debt being repaid after the disposal of assets.
Graph 6: Household sector debt to annual income ratio
Graph 6: Household sector debt to annual income ratio

      4. Mortgage debt to residential real estate ratio shows the extent to which the household sector's residential real estate assets are geared. At 30 June 1991, mortgage debt represented 13% of household sector residential real estate assets, while at 30 June 2006 this had grown to 26%. This indicated that mortgage debt grew faster than the value of the residential real estate owned. There is insufficient data in the ANA to calculate regional averages so the distributional impacts are not available. In addition, as mentioned in paragraph 17, the household sector mortgage levels grew in part because the household sector increasingly used mortgage loans for purposes other than housing, for example financial asset purchases.

      5. Debt to assets ratio gives an indication of the extent to which the household sector balance sheet is geared, that is the degree to which assets are dependent on debt. At 30 June 2006, household sector debt was equal to 19% of assets, an increase on 30 June 1991 when debt was equal to 13% of assets. Graph 7 represents both household sector gearing ratios.
Graph 7: Household sector gearing ratios
Graph 7: Household sector gearing ratios

      6. Debt to liquid assets ratio reflects the ability of the household sector to extinguish debts in a short period of time using their readily available, or liquid, assets. The ratio of household debt to liquid assets rose from 81% at 30 June 1991 to 124% per cent at 30 June 2006.

      7. Net worth to annual income ratio gives an indication of the overall long term health of the household sector balance sheet, taking into account the growth in assets and liabilities relative to growth in income. As can be seen from Graph 8 (below), after a relatively flat period from 1991 to 1996, this ratio increased steadily from 482% at 30 June 1996 to 739% at 30 June 2006, primarily because the growth in the value of total assets continued to outpace the growth in household debt and disposable income.
Graph 8: Household sector net worth to annual income ratio
Graph 8: Household sector net worth to annual income ratio

23. As Graph 9 below indicates, the growth in household sector assets as a percentage of gross disposable income exceeded the growth in debt as a percentage of disposable income, which is reflected in the growth in household sector net worth. Nevertheless, the growth in debt shows that the household sector exhibited a willingness to use debt to build its asset base. The rate of future growth in net worth will be dependant on changes in the value of household sector assets/liabilities and household sector saving. These variables, in turn, will be influenced by many factors, such as the buoyancy of the share market, house prices, home loan interest rates, marginal tax rates, unemployment rate movements and the overall growth of the economy.

Graph 9: Ratio of household sector assets and debt to disposable income
Graph 9: Ratio of household sector assets and debt to disposable income




END NOTES

Published data

24. Quarterly economic accounts published by ABS contain many series relating to the household sector. Basic data published are: income and use of income account (Table 61 released electronically as part of Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0); capital account (Table 33 Australian National Accounts: Financial Accounts, (cat. no. 5232.0); and stocks and transactions in financial assets and liabilities (Tables 15 and 31 Australian National Accounts: Financial Accounts (cat. no. 5232.0). Annually, additional details are published, including the sectoral balance sheet which includes estimates of stocks of non-financial assets in Australian System of National Accounts (cat. no. 5204.0).

25. The most recent household survey of household assets and liabilities conducted by the ABS was the 2003-04 Survey of Income and Housing, the results of which are available in Household Wealth and Wealth Distribution, Australia, 2003-04 (cat. no. 6554.0).

26. Data for the number of households used in this article are sourced from Australian Demographic Statistics (cat. no. 3101.0) and the projections from 2001-2004 are sourced from Household and Family Projections, Australia (cat. no. 3236.0).


Data limitations

27. Unincorporated businesses which have significant economic activity and available data are treated as corporations and are not included in the household sector. The inclusion of persons, unincorporated businesses whose activities are inextricably mixed with personal activities, and non-profit institutions serving households in the household sector in the national accounts is a limitation for some analytical purposes, as each undertake activity for different motives. The impediment to presentation of separate accounts for the three components is data availability. While some limited data about the components are available (see Table 4), most data sources are unable to discriminate. An example of the sort of difficulty experienced is the increasing use of revolving credit facilities, such as credit cards and home equity loans. Such facilities can provide both consumer and business finance at different times in the life-cycle of the facility, and the type of usage is not readily captured in the records of the credit providers. The inability to separate unincorporated business data from personal data is particularly limiting for some purposes, and there is some analysis undertaken outside the ABS which breaks down sectoral aggregates, notably by the Reserve Bank in the half yearly financial stability reviews published in the RBA Bulletin.

28. In addition to issues of detail, there are also issues of quality. Direct measurement of household sector financial aggregates is rare. Even when such data are available, such as taxation aggregates, they are only available with a considerable lag after the reference period. For regular quarterly accounts, most data sources provide indirect measures, for example counterparty information by financial institutions, and are therefore subject to classification and other errors by data providers. The measurement of the household sector's claims on and liabilities to the rest of the world is particularly difficult.


Calculation of average annual growth rates

29. Average annual growth rates that appear in Tables 1, 2, 3 and 5 have been calculated as follows:

Average annual growth rate=Equation: average annual growth rate
where:
P
1 = Value for earliest observation
P
m = Value for latest observation
m = number of observations (hence m-1 is the number of periods)


Related information

30. Related ABS publications and special articles which may be of interest include:


31. For further information please contact Amanda Seneviratne on (02) 6252 5338 or email <amanda.seneviratne@abs.gov.au>.

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