RBA spins Australia’s record household debt load

RBA assistant governor, Michele Bullock, has played down concerns of Australia’s record household debt, claiming that the top 40% of income distribution account for three quarters of the debt load:

“Three quarters of debt is owned by households that sit in the top 40 per cent of income distribution,” she told a conference in Melbourne. “That’s actually a positive thing. It suggests that maybe (high levels of debt are) OK because people on higher income may have the capacity to meet their payments and they’re less likely to become unemployed.

“The median debt-to-income ratio is similar. It’s risen across all income quintiles but the higher debt ratio sits with households that have higher income. So that’s a positive thing”…

“It’s only a problem if you lose your job and need to sell your house and it’s not worth as much as your debt,” she said.

The below chart summarises the situation, with Australia’s household debt amongst the very highest in the world:

And below shows the distribution, albeit as at 2015:

DFA’s independent household data shows that 32.2% of households with an owner-occupier mortgage – representing 1.8 million households – are experiencing mortgage stress and have little financial buffer to cope with a significant economic or financial shock:

And this comes despite interest rates hovering at all-time lows!

So, while many households carry no debt and are not at risk of defaulting, there are a significant percentage teetering on the brink.

Perhaps the bigger concern is that Australia’s record debt load will curb spending and domestic demand – a problem explicitly acknowledged by the RBA in a recent research paper:

The household debt-to-income ratio has risen to record levels in Australia in recent years, while household spending has been relatively weak (Figure 1)…

Australia has seen a strong increase in household debt and weak spending over recent years despite a persistently stable banking system and reasonable economic growth even during the GFC. This suggests that a high level of household debt may weigh on spending even when the economy is in a more ‘normal’ phase of the business cycle…


Consistent with international research, we find evidence that high levels of owner-occupier mortgage debt reduce household spending. Higher mortgage debt is associated with less spending even when we control for changes to net housing wealth and cash flow (adjusted for mortgage repayments). This implies that a deepening of both sides of the household balance sheet is associated with weaker spending, and that debt matters for spending over and above its effect on net wealth…
Overall, the negative effect of debt on spending is pervasive across households with owner occupier mortgage debt.

Thankyou Captain Obvious.

Leith van Onselen

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