More than 60% of young property owners 'over-indebted'

According to the ABS’ Household Income and Wealth data for 2015–16 released this week, the average household debt rose to $169,000 in 2015–16, compared to the 2003–04 average of $94,000.

Households that are in debt that is equal to three or more years’ worth of disposable income, or households with debt equal to three quarters or more of their household assets’ values, are considered over-indebted by the ABS.

Based off these calculations, 29 per cent of Australian households with debt are over-indebted, up by 8 per cent on the 2003–04 proportion.

Further, just under half of all households with mortgages (47 per cent) were over-indebted, making them the most likely to be over-indebted based on tenure type. Within this, 62 per cent of mortgagors between 25 and 34 years old fall into this category. Fifty-one per cent of households headed by 35–44-year-old owners with home loans were also over-indebted.

ABS chief economist Bruce Hockman added: “Nearly half of our most wealthy households (47 per cent) who have a property debt are over-indebted, holding an average property debt of $924,000. This makes them particularly susceptible if market conditions or household economic circumstances change."

The ABS figures also revealed that high-income houses were more likely to be over-indebted, with one-quarter of households in the top income quintile over-indebted compared to 16 per cent of households with income in the bottom 20 per cent.

"Not all households can access debt, nor do they acquire the same type of debts. In particular, households with low incomes, fewer assets, or in later life stages are often viewed by lenders as a higher risk, and therefore have difficulty securing loans," the ABS said, explaining why low-income households have a relatively lower rate of over-indebtedness.

"Households with higher incomes were more likely to hold debt, with 89 per cent of households in the top equivalised disposable household income quintile holding debt, compared to half of those in the lowest quintile.

"The amount of debt held by households also varied across the income distribution, with households in the highest-income quintile holding debt that was over seven times larger than the debt held by households in the lowest quintile ($386,300 compared to $52,600)."

The ABS also noted that over half (51 per cent) of Sydney and Melbourne households with property debt were considered over-indebted; however, the value of that debt varied, with Sydney households averaging a $765,400 bill and Melbourne households $496,400 — a figure that the ABS observed to be "considerably less".

The ABS said: "An additional 1 percentage point interest rate rise might therefore cost over-indebted Sydney households around $43 more per week than Melbourne households."

[Related: RBA: FHBs ‘crowded out of the market by higher housing prices’]