Who's drowning in debt?

The festive season is usually well stocked with reports about how consumers are up to their eyeballs in debt. Usually the reports selectively produce statistics and this year has been no different.

In the September quarter, household debt rose by $33.9 billion to a record $1396 billion. But over the same quarter, household financial assets (excludes houses) rose by a record $180.6 billion to $2402.2 billion. The 17.1 per cent lift in household wealth in the quarter was the largest ever recorded.

The latest data shows that credit card debt is growing at the slowest pace on record.


The facts and figures

It makes for a good story at Christmas time – a report to the effect that Australians are drowning in debt – but as always it pays to dig deeper behind the statistics. While debt is up, assets have risen by a record margin, pushing wealth levels sharply higher. At the same time, consumers are shunning credit cards in favour of debit cards.

On Christmas Eve the Bureau of Statistics revealed that household debt had hit record highs, up almost $34 billion in the three months to September to $1.4 trillion. That equates to over $63,000 per person. Sounds scary, that is until you look at the other side of the equation. Over the same quarter, household financial assets like shares and bank deposits soared by a record $180 billion to $2.4 trillion. That equates to household assets of over $109,000 per person. And that means that, on average, each Australian is in the black by around $46,000. The good news is that wealth hasn't just risen over the past six months – over the past decade per capita financial wealth has risen by 44 per cent.

Once the value of our homes is taken into account, CommSec estimates that household wealth hit $240,000 per person at the end of September quarter. In fact wealth levels at the end of the 2009 will probably get close to exceeding the previous record high of $250,000 set at the end of the 2007 calendar year.

The simple fact is that the values of our assets – shares, homes and bank deposits – have rebounded over the second half of 2009 and are now lifting at a record pace, far outstripping the value of our debt. While financial assets went backwards for all of the 2008 year, remarkably all the lost ground has now been made up in the space of just six months.

The other 'truism' that does the rounds at Christmas is that Australians hit the Boxing Day sales with gusto, maxing out their credit cards. Well, if that were to occur this year it would be substantially counter to recent trends.

As at the end of September the average credit card balance stood at $3,141, up just $30 or 1.0 per cent on a year ago. And smoothing out the data over the past year to account for the usual volatility, credit card debt grew at a 0.7 per cent annual pace – the slowest growth pace in 15 years of records.

Not only are consumers leaving less outstanding debt on their credit cards, they are frequently using their own cash – or debit cards – to make purchases, rather than put them on credit.

In September purchases made on debit cards were up 7.7 per cent on a year earlier whereas purchases made with credit cards were down 0.4 per cent.

Perhaps that means that Aussie consumers are still spending like no tomorrow, but with their own money instead? The implication being that consumers are running down their savings and accumulated wealth. Again, the evidence suggests otherwise. Retail spending grew by 5.6 per cent over the past year, slower than the decade-average pace of 6.1 per cent despite being boosted by government stimulus payments over the year. And more broadly, per capita household spending stood at just over 2.5 per cent of GDP (economy-wide spending) in the year to September – the lowest level in 50 years of records.

It hasn't always been the case – that is, that Australian consumers are spending responsibly and not racking up huge debts. In fact in the early noughties credit card debt expanded at a 20 per cent annual rate.

But there was a noticeable shift in consumer behaviour over 2008 when interest rates were rising. And the new era of conservatism continued over the period of the US financial crisis during 2009.

The simple fact is that household balance sheets have strengthened markedly over recent years. A key factor has been rising real incomes together with rising wealth levels and the new-found mood of conservatism. Aussie consumers are still keen on a bargain – but it has to be a bargain, it must meet a need and it must not break the budget. Sure debt levels continue to rise, but largely because consumers rationalise that they can afford to take on more debt as part of a responsible financial approach.

For retailers, consumer conservatism has led to trimming of margins – as was apparent in the widespread discounting in place before Christmas, and as Gerry Harvey was loathe to admit.

If consumers continue to push for bargains it will cause retailers to keep a tight rein on costs to maintain profitability. At the same time consumer bargaining activity will serve to cap inflationary pressures, perhaps even causing the Reserve Bank to delay future rate increases.

Craig James is CommSec's chief economist.