Household debt growth: not on the cards

Household debt in December 2022 was 4.3 times the size of 20 years ago and almost all of this increase has been in housing finance. Personal debt increased by the much smaller amount of 65 per cent over this 20-year period and in the last five years, when housing loans grew by 25 per cent, personal loans fell by 6.2 per cent.

"As the economic cycle moves from a period of historically low interest rates to levels considered closer to ‘normal’, the question becomes whether this will have an impact on the payment card market.”

The net effect of the considerable $1,701.2 billion growth in housing finance over the last 20 years compared to just $56.2 billion in personal loans has resulted in personal lending dropping from a 16.2 per cent share of total household debt in 2002 to 6.2 per cent in 2022.

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Some observers look at the amount of money spent on payment cards - particularly credit cards - with concerns about the use of expensive credit facilities to prop up stretched and stressed household budgets.

Payment card statistics certainly show a steady and substantial growth in value with the total passing the $1,000 billion mark in 2022. The growth has been steady throughout the last 20 years - with the exception of 2020 when the global pandemic had a severe impact on commerce, travel and household lifestyles. The rebound in spend in 2021 and 2022 has been considerable.

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Cash transactions account for about 11 per cent of the value of card spend but at $117.1 billion in 2022 were below the level of 2002. Cash withdrawals on debit make up over 95 per cent of the value of card-based cash transactions.

Meanwhile, cash advances on credit cards are an expensive form of credit and an increase in their use could signal evidence of underlying financial stress. There was growth in this category, up until the global financial crisis. But since 2008 there has been a substantial fall in the annual value of cash advances on credit and charge cards.

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A look at purchases shows a profound change in their composition with debit cards accounting for 32.3 per cent of the value of purchases in 2002 and 57.9 per cent in 2022. Three quarters of all card-based purchase transactions are now made with a debit card. Australian consumers have increasingly selected debit over credit and charge. This is a form of financial discipline as it utilises existing funds rather than potentially risking an accumulation of debt.

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Although declining in share of total household lending, credit and charge card balances had a slightly higher share of personal lending at 26.9 per cent in 2022 compared with 25.1 per cent in 2002. There has however been a material change in the share of these balances incurring interest expenses.

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In 2002, the share of balances on personal credit and charge cards on which interest was accruing was 74 per cent. By 2011, that had increased to 77 per cent, meaning that cardholders were paying interest on over three quarters of the balances on their credit and charge cards.

But by 2022, the share of balances accruing interest was down to 53 per cent. The result is credit and charge card balances on which cardholders are paying interest is now below 15 per cent of total personal debts outstanding.

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The fall in the share of balances on which cardholders were paying interest meant the value of balances accruing interest in 2022 was just 3.3 per cent higher than in 2003. Over this same period, the value of credit and charge card spend had risen by 268 per cent from $140.8 billion to $378.2 billion.

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Two further indicators of the extent to which credit and charge cards could be a cause for concern on household indebtedness are the average credit limit on an account and the extent to which these are utilised.

The average credit limit on a personal credit and charge card account increased between 2002 and 2012 but has been remarkably stable over the last decade. At $9,319 per account over the 12 months to December 2022, the average annualised limit is just 2.8 per cent above the level of 10 years ago; a decline in real terms.

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The “Balance to Limits” ratio is a key indicator as it measures the extent to which cardholders are utilising the credit limit on their card account. We have noted the average absolute value of a credit limit is now lower in real terms than 10 years ago. The Balance to Limits index shows not only is the limit lower but the utilisation of those limits was already trending lower before it plummeted during lockdown. While it is now rising, it remains well below the level of 10 and 20 years ago.

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As the economic cycle moves from a period of historically low interest rates to levels considered closer to “normal”, the question becomes whether this will have an impact on the payment card market.

The data suggest there is a much looser nexus between the interest rate on a credit card and one on a home mortgage. The interest rates on credit cards have barely moved in recent years as cards are high transaction volume, unsecured lending products with relatively low balances compared with home loans which typically have a higher balance and very few transactions.

Accordingly, the two products have very different cost structures. In terms of consumer impact, increases in the cash rate are expected to have minimal impact on credit card use. But as the first graph in this article shows, the total value of home lending dwarfs that of card balances. So that is where we would expect to see an impact.

Michael Ebstein is the director of MWE Consulting