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Special Article - Household sector data in the financial accounts
F1 COMPONENTS OF HOUSEHOLD DEBT
5 To gain further insight into growth in household debt, Table F2 provides some additional unpublished detail on contributions. Since 1995 mortgage borrowing has been the main contributor to growth in borrowings. See the graph at F3.
F2 MORTGAGE AND OTHER LOANS TO HOUSEHOLDS
6 On the demand side of the mortgage market, there have been a number of factors including the impacts of interest rates remaining at low levels, an increase in demand as home purchasers sought to avoid the impact of the Goods and Services Tax introduced at June 2000, and subsequent support by the Government's First Home Owner Scheme.
F3 MORTGAGE LOANS TO HOUSEHOLDS
7 The growth in mortgage debt has been facilitated on the supply side by financial innovations. Since 1995 there has been product innovation, such as home equity loans (essentially overdrafts secured by mortgage) and funding innovation, notably securitisation. Securitisation is a process whereby lending institutions remove mortgages from their balance sheets by sale to special purpose vehicles (usually trusts). The purchase is financed by the trust issuing debt securities. The cash proceeds from the sale can be used by the selling institution to initiate additional mortgage lending.
8 Two developments supported the growth in securitisation over the period. Firstly, there was clarification of the prudential supervision rules governing the banks concerning the standards for the "clean" sale of assets, and hence the need to retain capital against contingencies which may arise from assets no longer on the balance sheet. Secondly, the supply of high quality fixed interest securities in the form of national government and state central borrowing authority bonds was decreasing following concerted efforts of governments at all levels to reduce debt, including the use of proceeds from unprecedented asset sales programs. At the same time institutional investors had an increasing demand for fixed interest securities driven by the growth in superannuation balances which they manage. The graph at F4 shows the substitution of asset-backed bonds for government bonds in the long-term bond issuance market over the period.
F4 HIGH QUALITY BONDS ON ISSUE
9 Over the period household assets also increased. Although all assets are available for sale to reduce debt in a crisis, some are more liquid than others. Table F5 shows the components of the household balance sheet by broad liquidity characteristics.
10 Of the illiquid components (column 4 in Table F5 comprises insurance technical reserves, non-financial assets, and accounts receivable), insurance technical reserves show significant growth, driven by compulsory superannuation contributions via the superannuation guarantee levy. In principle, account balances in superannuation funds cannot be drawn until retirement age. However, such savings require investment, and market processes such as securitisation are effective in channelling funds from accumulated household savings to household borrowings. The real estate aggregate in column 3 is derived by summing the values for land, dwellings and other structures owned by the sector as published in the annual balance sheet table in Australian System of National Accounts (ABS cat. no. 5204.0). Estimates for land-with-dwelling package, that is excluding commercial and farming structures and land, are not available.
11 The more liquid components are available for meeting debt obligations in a crisis. Notable is the growth in the proportion of household assets held in the form of equity. Growth in equity holdings of households has been driven by increases in market values of the equity acquired by the sector through the privatisation of a number of large government business enterprises by flotation on the stock exchange, through demutualisations of a significant number of insurance co-operatives into corporate structures, and through more active participation in the share market generally.
F5 SELECTED HOUSEHOLD AGGREGATES
Debt incidence and servicing
12 Using the data in tables F1, F2 and F5 it is possible to derive some averages per household of assets and liabilities, by dividing the aggregates by the number of households, See table F6. Growth rates in assets and liabilities on a per household basis are lower than the aggregates because the number of households is also growing. Of course averaging in this way does not take into account debt and liability distribution patterns, but it offers a broad picture of the incidence of growth in aggregates on families. It should be borne in mind that assets and liabilities of most unincorporated businesses are included in the aggregates (see notes for data limitations). Liability growth generally exceeds asset growth on a per household basis, as typified by the real estate equity ratio (column 9). This represents the unencumbered portion of real estate assets and is calculated by deducting mortgage debt (column 2) from real estate assets (column 4) and expressing the result as a percentage of real estate assets. The decrease in the ratio reflects mortgage debt growing faster than the value of real estate owned.
F6 AVERAGE ASSETS AND LIABILITIES PER HOUSEHOLD
13 Debt servicing ability is a consideration when assessing debt growth. Table F7 looks at three aspects of debt servicing:
(a) Interest payable represents a small but growing proportion of per household disposable income, See column 8. Interest payable is an unpublished series from the annual national accounts and is derived by summing "pure" interest paid components for consumer debt, dwelling and unincorporated business debt, plus financial intermediation services indirectly measured (FISIM) loan imputations for persons, dwellings and unincorporated businesses, and approximates commercial interest values. Data for this derivation is not available prior to June 1996. Column 4 shows the notional interest rate thus derived on average debt balances for each year from 1996-97;
(b) The debt to income ratio indicates the proportion of annual income needed to repay all debt. Ratios greater than 100% indicate more than one year's income is required. Columns 5 and 6 provide two versions of this ratio: the ABS measure based on the disposable income and debt data in this article, and the Reserve Bank of Australia measure which uses estimates of personal sector data and borrowing data to derive the ratio rather than the broader aggregates. See below for a discussion of components and derivation. Both measures indicate a worsening debt service ability over the time period in review;
(c) The debt to liquid asset ratio looks at the ability to repay debt by liquifying assets, See column 9. This ratio shows some volatility over the time period in review because of the valuation fluctuations of the equity component. The overall trend shows a worsening ability to repay debt. However, the ratio remains at less than 100%, indicating capability of meeting debt commitments out of available resources, lending support to "wealth effects" being an influence on households' demand for debt.
F7 HOUSEHOLD DEBT SERVICING
14 The graph at F8 presents the RBA and ABS debt/income ratios. The two series show broadly comparable movements over time. This is not surprising given that both are compiled from similar data sources. However, there are some differences in objectives and hence there are technical differences. The two series can be seen as complementary, with the ABS measure being a broad indicator whilst the RBA measure is more tightly targeted at a narrower definition of households.
(a) The ABS series uses gross disposable income for the household sector, and gross debt for the household sector. The household sector includes unincorporated businesses and non-profit institutions serving households in both cases. Gross debt includes both borrowings and other debt, irrespective of source of debt provider;
(b) The RBA measure adjusts disposable income and debt to target a narrower definition of households. Mixed (i.e.business) income is deducted from gross disposable income to proxy personal disposable income; and to the extent possible unincorporated business and other commercial lending by institutions is excluded from borrowings. Borrowings are measured as the sum of the asset side of broad money institutions (banks, building societies, credit unions, money market corporations, and finance companies) and outstanding securitised mortgage debt, so the ABS coverage is broader due to inclusion of items such as accounts payable.
F8 DEBT TO INCOME RATIOS
15 The ABS will present some of the analytical series developed in this article in future Financial Accounts publications in commentary on the household sector. There are some potential refinements.
16 The ABS has a research project which is melding national accounts data and household survey data to produce further insights into household finances and wealth. The results of this research are anticipated to be published later this year. It is expected that some of the results of this research will be incorporated into quarterly Financial Accounts compilation.
17 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 the income and product accounts, ABS cat. no. 5206.0): capital account (Table 33 Financial Accounts, ABS cat. no. 5232.0); and stocks and transactions in financial assets and liabilities (Tables 15 and 31 Financial Accounts, ABS 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 (ABS cat.no. 5204.0). Data for the number of households used in this article is sourced from Australian Demographic Statistics (ABS Cat.No. 3101.0).
18 Across these accounts and data releases, a consistent definition of the household sector is employed. The sector includes: persons in their capacity as consumers; unincorporated businesses whose activities are mixed with personal activities (some unincorporated businesses where sufficient detail of activities are known, such as branches of foreign companies, are included in the trading or financial corporations sectors); and non-profit institutions serving households (churches, charities, political parties, trades unions for example).
19 The inclusion of the three groupings of transactors in the accounts is a limitation for some analytical purposes, as each undertake activity for very different motivations. The impediment to presentation of separate accounts for the three subsectors is data availability. Whilst some limited data about the subsectors is available, most data sources are unable to discriminate sufficiently. 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 quarterly monetary conditions reviews published in the RBA Bulletin.
20 In addition to issues of detail, there are also issues of quality. Direct measurement of household sector aggregates is rare, and when feasible, such as taxation aggregates, is only available with a considerable lag after the reference period. 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. Some aggregates for households are compiled as the residual after all other components have been identified and are subject to net errors and omissions in the process.
21 Data sources and methods and quality assessments are documented in Australian National Accounts: Concepts, Sources and Methods (ABS cat. no. 5216.0). For further information on financial assets and liabilities please contact Derick Cullen (02) 6252 6244; for further information on disposable income, interest flows and real estate assets please contact Carl Obst (02) 6252 6713.
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