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A Tale of Two Surveys: Household Debt and Financial Constraints in Australia

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  • Gianni La Cava

    (Reserve Bank of Australia)

  • John Simon

    (Reserve Bank of Australia)

Abstract

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.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2003-08.

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Date of creation: Jul 2003
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Handle: RePEc:rba:rbardp:rdp2003-08

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Related research

Keywords: household debt; household surveys; households; liquidity constraints; HILDA; HES;

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References

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  1. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  2. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, October.
  3. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  4. Fumio Hayashi, 1982. "The Effect of Liquidity Constraints on Consumption: Cross-Sectional Analysis," Discussion Papers 516, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  6. John V. Duca & Stuart S. Rosenthal, 1993. "Borrowing constraints, household debt, and racial discrimination in loan markets," Research Paper 9312, Federal Reserve Bank of Dallas.
  7. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  8. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  9. Cox, Donald & Jappelli, Tullio, 1993. "The Effect of Borrowing Constraints on Consumer Liabilities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 197-213, May.
  10. Nilss Olekalns, 1997. "Has Financial Deregulation Revived the Permanent Income/Life Cycle Hypothesis?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(2), pages 155-166.
  11. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
  12. Little, Roderick J A, 1988. "Missing-Data Adjustments in Large Surveys," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(3), pages 287-96, July.
  13. repec:fth:harver:1435 is not listed on IDEAS
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Cited by:
  1. Yunyong Thaicharoen & Kiatipong Ariyapruchya & Titima Chucherd, 2004. "Rising Thai Household Debt: Assessing Risks and Policy Implications," Working Papers 2004-01, Economic Research Department, Bank of Thailand.
  2. Laura Berger-Thomson & Elaine Chung & Rebecca McKibbin, 2009. "Estimating Marginal Propensities to Consume in Australia Using Micro Data," RBA Research Discussion Papers rdp2009-07, Reserve Bank of Australia.
  3. Robert Breunig & Deborah A. Cobb-Clark & Xiaodong Gong & Daniella Venn, 2005. "Disagreement in Partners’ Reports of Financial Difficulty," ANU Working Papers in Economics and Econometrics 2005-453, Australian National University, College of Business and Economics, School of Economics.
  4. Katherine Henderson & Grant M. Scobie, 2009. "Household Debt in New Zealand," Treasury Working Paper Series 09/03, New Zealand Treasury.
  5. Yunhee Chang & Ki Lee, 2006. "Household Debt and Marital Instability: Evidence from the Korean Labor and Income Panel Study," Journal of Family and Economic Issues, Springer, vol. 27(4), pages 675-691, December.
  6. Robert Breunig & Deborah Cobb-Clark & Xiaodong Gong & Danielle Venn, 2007. "Disagreement in Australian partners’ reports of financial difficulty," Review of Economics of the Household, Springer, vol. 5(1), pages 59-82, March.
  7. Jonathan Crook & Stefan Hochguertel, 2007. "US and European Household Debt and Credit Constraints," Tinbergen Institute Discussion Papers 07-087/3, Tinbergen Institute.
  8. Ellis Connolly, 2007. "The Effect of the Australian Superannuation Guarantee on Household Saving Behaviour," RBA Research Discussion Papers rdp2007-08, Reserve Bank of Australia.
  9. Ellis Connolly & Fiona Fleming & Jarkko Jääskelä, 2012. "Households' Interest-bearing Assets," RBA Bulletin, Reserve Bank of Australia, pages 23-32, December.

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