The inequality in the distribution of household savings is considerably worse than the much talked about inequality in incomes, a new report has found. Beyond our Means? Household Savings and Debt in Australia by the Bankwest Curtin Economics Centre examines the level and distribution of savings and debts across Australian households and the impact this will have on 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 20 per cent.
However, their savings, averaging $1.3 million, are 200 times the bottom 20 per cent, averaging $6,000.
BCEC director Professor Alan Duncan said the top 20 per cent received one-third of all income but they owned 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,” Prof Duncan said.
“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.
“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.”
Comparing the states and territories
As the second report in the BCEC’s ‘Focus on the States’ series, the findings outline the significant differences in household savings and debt between the states and territories.
The ACT and NT boast the highest levels of savings with an average of $436,200, whereas households in Tasmania record the lowest at $296,700. Debt is 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.
Professor Duncan said the divide between city and country residents was considerable. He said urban dwellers had more savings on average than those in regional Australia but carried double the average household debt than their country counterparts.
Capital city households hold on average $352,000 in savings compared to those living outside cities and in regional Australia average $316,000 ($36,000 less). 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 – the only location to see savings decline in real terms with a drop of four per cent between 2005 and 2015.
The report found that savings and debt behaviour has changed considerably over time, particularly in the post-Global Financial Crisis 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,” Prof 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 10 years to 2015, while investment loans have decreased by 10 per cent and personal loans by 24 per cent.
We’re more comfortable with debt than we used to be
Despite current increased savings rates, the data shows household debt is still three times higher than it was 20 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,” Prof 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,” Prof 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 of the Beyond our Means report
- 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 past decade, net government debt as a proportion of total revenue has increased across all states and territories.
- SA, VIC and QLD 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. WA 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.
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 10 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’, the concept that as actual and perceived wealth increases, spending will also increase.
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 debt 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 among those aged 35-44 and 55-64 years.
Significant mortgage equity withdrawal activity is taking place among 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.