A new report released today (Wednesday 17 June) by the Bankwest Curtin Economics Centre (BCEC) finds that the inequality in the distribution of household savings is considerably worse than the much talked about inequality in incomes.
Beyond our Means? Household Savings and Debt in Australia is the second report in the BCEC’s ‘Focus on the States’ series. It examines the level and distribution of savings and debt across Australian households and the implications this may have on the financial security and wellbeing of families now and in the future.
Using the latest household income data, economists at BCEC have estimated that the average household disposable income of the top 20 per cent of savers is less than four times those in the lowest savings quintile. However, their savings (averaging $1.3 million) is 200 times the bottom 20 per cent (averaging $6,000).
Professor Alan Duncan, BCEC Director, said the top quintile may receive one-third of all income but they own three-quarters of the total value of savings. This shows a huge gulf between the top and the bottom – bigger than what is observed when looking at income alone.
“The ratio of average debt to disposable income for low economic resource households has deteriorated over the last few decades. In 1990, the average household debt represented less than six months of income for these households. In 2015 it represents one and a half years of household disposable income,” Professor Duncan said.
“The trifecta of debts, low (or no) savings and low incomes presents many families with an unenviable challenge to maintain an acceptable quality of life for themselves and their children on a day-to-day basis.”
The report also outlines the significant differences in household savings and debt between the states and territories. The Australian Capital Territory/Northern Territory boasts the highest levels of savings with an average of $436,200, whereas households in Tasmania record the lowest, $296,700.
“The divide between the city and the country is also considerable,” Professor Duncan said.
“Households in the capital cities have more savings on average than those in regional Australia, but carry almost double the average amount of household debt than their country counterparts.”
Capital city households hold on average $352,000 in savings – those living outside cities and in regional Australia average $316,000 (a $36,000 difference). Capital city households also hold on average $177,000 in debt, which compares to $98,000 on average for those in the country.
Households with the least growth in average savings are those in country South Australia; this is the only location to see savings decline in real terms – down four per cent between 2005 and 2015.
The report finds that savings and debt behaviour has changed considerably over time, particularly in the post-Global Financial Crisis (GFC) period.
In the period after the GFC, the national household saving ratio climbed to heights not seen since the 1980s. The household savings ratio peaked at 11.2 cents in the dollar in 2011, but has since been trending downward, with Australian households now saving 8.5 cents of every dollar.
“Following the GFC, Australians decreased their propensity to take on debt and exhibited discipline in their expenditure at a time when the economic outlook was uncertain,” Professor Duncan said.
“The tough times associated with the GFC may have motivated households to budget with more care, but we have some concerns that those disciplines are starting to fade.”
Considerable real growth in superannuation, trusts and cash deposits has been seen in the last ten years, while equities and business savings have decreased.
Student loans have grown the fastest out of all debt classes at a growth rate of 65 per cent in the ten years to 2015. This is closely followed by other property debt (62 per cent) and mortgages (59 per cent). Real credit card debt decreased by 2 per cent in the ten years to 2015, while investment loans have decreased by 10 per cent and personal loans by 24 per cent.
Despite current increased savings rates, the data shows household debt is still three times higher than it was twenty years ago and the rate and amount of savings is declining.
“Australians are now more comfortable with debt, and accustomed to living with debts equal to one and a half years of income whereas in the past they had debt equivalent to only six months’ income,” Professor Duncan said.
“However, with household debt to income ratios three times higher now than a quarter of a century ago, household debt up by over 50 per cent in real terms over the last decade and the debt of those approaching retirement (55-64 year olds) up 64 per cent in real terms, there may be cause for concern.”
The use of debt runs the risk of households living beyond their means by funding a lifestyle that cannot be supported by current income alone.
“The sudden deterioration in financial security when the unexpected happens – the loss of a job, illness, or a relationship breakdown – can lead to a decline not only in financial wellbeing, but not uncommonly in physical or mental health as well,” Professor Duncan said.
“There is an imperative to maintain adequate income support and access to good financial planning, protection and counselling to prevent a chronic deterioration in their situation and outlook.”
Average mortgage debt as a proportion of property values has almost tripled over the last 25 years, rising from 10 per cent to 28 per cent since 1990. If superannuation savings earmarked for retirement are instead diverted to pay down mortgage balances when people approach the end of their working lives, then future financial security may be affected and a greater reliance will be placed on support from the state.
Key Findings:
The Big Picture
- Government net debt in Australia currently stands at $226 billion. International comparisons show that Australia was placed 21 out of a selected 25 OECD countries both in terms of net debt as a proportion of GDP and revenue.
- Government net debt relative to revenue has seen the most rapid increase since the GFC, jumping from 15.2 per cent to 54.4 per cent in just over five years.
- Over the last ten years, net government debt as a proportion of total revenue has increased across all states and territories.
- South Australia, Victoria and Queensland have seen net debt relative to revenue increases outpace the rest of the state and territories in recent times, with all three states above 50 per cent. Western Australia has had similar patterns of debt to revenue increases.
- In the period after the GFC, the household saving ratio climbed to heights not seen since the 1980s, to 11.2 per cent of income by end 2011. The household savings ratio currently sits at around 8.5 cents in the dollar.
- Australians are living with higher debt, currently equal to 1.5 years of income whereas in the past they had debt equivalent to half annual income.
- The share of debt associated with investment property loans has tripled from one-tenth to three-tenths between 1990 and 2015.
- Total household financial assets have risen from $767 billion to $3.96 trillion in the last two decades – an annual rate of growth of 8.8 per cent. Around half of this growth has been driven through superannuation savings, which totalled $2.05 trillion in March 2015.
- Household debt has been growing at an annual rate of 10.3 per cent over the last 20 years and now stands at over $2 trillion dollars.
- The rate of growth in household debt has slowed since the GFC to an annual average of 6.2 per cent over the last five years.
Distribution of household savings and debt
- The average Australian household in 2015 is estimated to have savings of $340,900. The typical or median household, one that sits in the middle of the distribution of Australian savers, has household savings of around $100,000.
- The richest 20 per cent of households have an estimated average of $1.3 million in savings. This is more than 200 times the average of the poorest households, which have on average $5,900 in savings.
- Superannuation and cash deposited in financial institutions are the main forms of savings for most Australians, representing two-thirds of average household savings.
- The richest one-fifth of households have three-quarters of household savings. The second richest quintile control 15 per cent and the remaining six-tenths of households own under 10 per cent.
- While all quintiles have significant proportions of their savings in superannuation and cash deposits, those with the highest savings (top 20 per cent of households) still own around two-thirds of these assets (68 per cent of superannuation and 62 per cent of cash deposits). They also own almost all the value of trusts (95 per cent), equities (86 per cent) and business assets (93 per cent).
Savings and debt across states and territories
- The combined territories ACT/NT have the highest level of average household savings ($436,000), closely followed by WA ($370,000)
- Debt is also highest for the ACT/NT and WA, followed by NSW. NSW, however, does not enjoy similarly high savings levels, reflecting high relative property prices.
- The high prices of Sydney real estate and associated loans means that property debt as a proportion of total household debt is highest in NSW at 92.5 per cent.
- Households in the capital cities have more in savings ($36,000 on average) but almost double ($79,000 on average) the household debt of their country counterparts.
Who saves and who owes?
- The youngest households have the lowest average household savings ($32,800) and those approaching retirement in the 55-64 age group have the highest average with over half a million dollars in savings ($532,400).
- Older couples only have the highest average levels of savings – over half a million dollars.
- Lone person households where the household head is aged less than 35 years have the lowest level of household savings – $61,000 followed by single parent households – $89,000.
- The low savings of single parent households is exacerbated by reasonably high levels of debt. They have an average debt level of over $100,000 and are the only type of household with people aged 35 or more years that has more debt than savings.
- The least indebted households are lone person or couple only households aged 65 years and over. A clear objective, and a sensible one, for those entering or in retirement is to reduce household debt.
- Higher incomes are related to higher levels of savings but not perfectly. Other factors are important in determining savings level, including household type and life stage.
Trends over time
- Savings behaviour has changed considerably in the last ten years, exceeding the growth rate of both debt and disposable income.
- Growth in savings is a result of significant growth in cash deposits, trusts and superannuation which is owned by almost all households.
- Capital cities have seen their disposable income increase by an average of 39 per cent over the last decade, while the remaining state balances have only seen an increase of 31 per cent.
- The greatest change in real household disposable income was in Perth (up 68 per cent) while the lowest was for those in country Victoria (up 20 per cent).
- Hobart recorded the largest growth in savings between 2005 and 2015, with an average increase of 143 per cent. This took Hobart from one of the capital cities with the lowest average savings of $142,900 in 2005-06 to one of the highest with average savings of $347,500 in 2015.
- Student loans have grown the fastest out of all debt classes at a growth rate of 65 per cent in the ten years to 2015. This is closely followed by other property debt (62 per cent) and mortgages (59 per cent).
- Real credit card debt has decreased by 2 per cent in the ten years to 2015, while investment loans have decreased by 10 per cent and personal loans by 24 per cent.
The top, the bottom and the unexpected
- There are almost 700,000 households in Australia that have savings or financial assets valued at $1 million or more – excluding the family home
- Millionaire households may only represent a small proportion of all households (8 per cent) but they hold more than half of all savings – more than the total of the other non-millionaire households combined.
- The combined territories of ACT/NT have the highest proportion of millionaire households.
- The number of millionaire households has increased from under 300,000 since 2005 to almost 700,000 in 2015.
- Growth in the popularity of trusts has seen the proportion of households with trusts rise from one-quarter to one-third of millionaire households since 2005, and the typical amount in trusts rise from $160,000 to almost $600,000.
Beyond our means? Saving for the future
- Growth in both debt and savings have outstripped income and increased expenditure. This may be caused by the ‘wealth effect’, which states that as actual and perceived wealth increases, spending will also increase.
- Australians are now more comfortable with debt, accustomed to living with debts equal to 1.5 years of income whereas in the past they had debt equivalent to only half annual income.
- The use of debt runs the risk of a household living beyond its means by funding a lifestyle that cannot be supported by current income.
- Financial deregulation and mortgage innovations in the 1980s and 1990s have led to the development of a suite of mortgage products which allow home owners to draw down upon as and when needed, without having to sell the home.
- Large increases in borrowing secured against the family home was witnessed during the 1990s and early 2000s when house prices soared on the back of a historic housing market boom.
- Mortgage indebtedness has risen among all age groups over the past two decades, particularly for those aged 45-54 years. Amongst this age group, the incidence of mortgage debt rose by over 35 percentage points between 1990 and 2011-12, followed by a 30 percentage point increase amongst those aged 35-44 and 55-64 years.
- Significant mortgage equity withdrawal (MEW) activity is taking place amongst those aged 35-54 years.
- Prior to 2007-08, the incidence of mortgage equity withdrawal rose amongst nearly all age groups. Since 2007-08, the propensity to use MEW fell amongst younger age groups, but continued for those approaching retirement.
- WA homes owners were more likely to be engaged in mortgage equity withdrawal than other states prior to the GFC.
Full copies of Beyond our Means? Household Savings and Debt in Australia are available from the BCEC website (www.business.curtin.edu.au/bcec) and upon request.
A companion BCEC report looking at the issue of government debt and expenditure will be released in October of this year.
BCEC’s next report in the ‘Focus on Western Australia’ series will explore The Cost of Doing Business in WA, scheduled for release in July.
