Over the past decade, household debt (as a share of household income) has reached
historically high levels. This has raised concerns about whether, as a result of the
rise in debt, households are now more financially ‘fragile’.
Using data from the 1998/99 Household Expenditure Survey (HES), a logit model
is constructed to examine the relationship between the probability of being
financially constrained and the economic and demographic characteristics of
households in Australia. We find that the probability of a household being
constrained is significantly affected by demographic and economic variables such
as age, marital status, home ownership, weekly household income, the proportion
of income earned from interest, and the share of income going to repayments on
mortgage debt. Unfortunately, however, we cannot separately identify households
with investor housing debt and so cannot examine the relationship between this
component of household debt and the probability of being financially constrained.
We also apply the model to data from the 1993/94 HES and the 2001 Household,
Income and Labour Dynamics in Australia (HILDA) Survey. Our results imply
that the overall proportion of households who are financially constrained in the
economy has fallen or, at worst, remained unchanged between 1994 and 2001.
Separating households into financially constrained and unconstrained groups, we
find that much of the rise in debt appears to have been due to unconstrained
households taking on more debt. As such, the rise in the aggregate debt to income
ratio associated with owner-occupier mortgages appears to be the result of
voluntary household choice rather than a result of increased household financial
distress. Hence, the increase in owner-occupier mortgage debt has not been
associated with an increase in the proportion of households who are financially
constrained.