Australian household debt and the macroeconomic environment

26 May 2020

Purpose This paper aims to investigate the effect of labour market conditions and monetary policy on households' attitude towards debt in the Australian context. Design/methodology/approach In doing so, household debt is categorised into housing, and consumer debt and the relationship is empirically tested through the use of a vector error correction model. Findings Consumer debt is found to be highly dependent on consumption with employment income and unemployment having a statistically insignificant effect, whilst monetary policy showing an inverse relation to consumer debt. The findings suggest that household consumption appears to be the primary determinant for consumer debt, which then behaves as a wage substitute. In terms of housing debt, income and monetary policy positively affect households' decisions with consumption and unemployment having a negative impact on the level of housing debt. The empirical results suggest that housing debt behaves as a proxy for household investment. Originality/value This paper empirically investigates the impact of selected macroeconomic variables on housing and personal debt separately. The findings suggest that monetary policy and labour market conditions have different impacts on the two separate debt types.