Australian Household Debt - an empirical investigation into the determinants of the rise in the debt-to-income ratio

Abstract: Australia’s household debt to disposable income ratio has increased substantially over the last 30 years. While there has been much theoretical discussion into what has caused this development, the empirical research into the field is limited. In this essay we analyse the determinants of the household debt-to-income ratio, using both long-run cointegration analysis and a short-run error-correction model. We find that in the long run the change in the debt ratio depends positively on house prices and negatively on interest rates. In the short run it depends positively on the change in house prices and the consumer sentiment index and negatively on inflation and long-run equilibrium error term. It is also evident that there is a high degree of inertia in the debt-to-income ratio indicating that it takes a long time for households to adjust their debt levels to current economic conditions.