Hangover Cure: Dealing with the household debt overhang as interest rates rise

Our modelling suggests that even a relatively benign unwinding of today’s emergency interest rate position allied with anticipated growth in household incomes has the potential to roughly double the number of households facing some form of repayment problem by 2018:

• The number of ‘highly geared’ mortgagors (spending more than one-third of their after-tax income on repayments) increases from 1.1 million to 2.3 million, equivalent to one-in-four households with a mortgage.
• The number of households in the more severe situation of ‘debt peril’ (spending more than one-half of their after-tax income on all forms of debt repayments) increases from 0.6 million to 1.1 million.
• Concerns about the debt overhang are intrinsically distributional: exposure to rate rises is relatively concentrated among low to middle income households. Three out of every four mortgagors in the bottom 10 per cent of the income distribution are found to be ‘highly geared,’ falling across the distribution to just one-in-eight within the top decile. Failing an economic recovery that delivers broad-based income growth across the distribution, today’s debt overhang has implications for future economic and social outcomes.