By Michael D’Rosario
Government policies that incentivise property investment do so at ever increasing personal debt levels resulting in Australia evidencing the second highest level of personal debt after the Swiss. This means that Australian households while wealthy in net wealth and asset terms, carry far more risk than nearly all other individuals within advanced economies in the OECD notwithstanding the Swiss who evidence a much smaller development available land mass and population.
It is therefore very important to consider the resilience of Australian households. Recent research from the RBA (2020) is instructive. The RBA research results suggest that risks arising from Australian household indebtedness are more subtle than sometimes conveyed (RBA, 2020). Most pertinently key market parameters, and factors, such as changes in the level of real income, nominal rate levels and household ownership of rental stock, account for currently household debt levels.
The RBA assert that banks are seemingly resilient to such risk factors and severe downturns given moderate loan to valuation ratios on the mortgages they assign. The study is notable given there is a dearth of such research in Australia. The study did not consider risk through the lens of the poor hand to mouth and wealthy hand to mouth framework for risk analysis, and this has implications for risk, consumption and house prices.
However, RBA do note that there are risks, particularly as they pertain the recent price escalation, and that their model cannot account for this increase in debt over the past four or five years. In addition, the RBA demonstrate that a large but plausible fall in asset prices could lead to a substantial fall in consumption and that the increase in indebtedness over the past decade has slightly increased the potential loss of consumption during periods of financial stress. Recent research published by Lowe (2017) considers the risk implications of recent price trending with a focus on resilience.
Lowe (2017) asserts that “while borrowing has added to the upward pressure on prices the underlying cause is embedded in the supply–demand dynamics. It is concluded that the recent increase in household debt relative to incomes has made the economy less resilient to future shocks.” This trend in the ratio of Australian housing prices is likely to drive more families into the wealthy hand to mouth category and potentially into more extreme conditions.
Exploring the Australian conditions to the lens of hand to mouth spending behaviour is important, as it offers insight into the lived experience of Australian families. Much of the literature is quite recent, but notably there is significant comparative analyses exploring differences amongst advanced OECD countries. We provide a precis to this literature presently.
House price escalation and the wealthy hand to mouth effect
The “wealthy hand-to-mouth” are households that hold little or no liquid wealth, whether in cash or in checking or savings accounts, despite owning sizable amounts of illiquid assets (assets that carry a transaction cost, such as housing or retirement accounts).
Traditional economics considered two cohorts, in the broadest sense, the poor, with a high marginal propensity to consume, and the wealthy. Under the Wealthy Hand to Mouth framework (W-HtM) model there are three cohorts,
- Poor HtM = Individual households with little liquid funding, with little to no earnings surplus and little by way accumulated illiquid assets
- Wealthy HtM = Individuals with significant accumulated illiquid assets, but little by way of surplus liquid assets
- Non HtM = Individual households with both liquid and illiquid assets
Kaplan et al 2015 employ longitudinal survey data on household portfolios for the United States, Canada, Australia, the United Kingdom, Germany, France, Italy, and Spain to document the share, and quantify the associated attributes of such households. Notably the research explored the household demographic characteristics, the composition of their balance sheets, and the persistence of hand-to-mouth status over their life cycle. This is pertinent as the HtM interval/term generally occurs early career to mid career, around middle age, and is considered transitionary, as individuals accumulate more assets through time.
The portfolio configuration of the wealthy hand-to-mouth suggests that these households may have a high marginal propensity to consume out of transitory income changes, a prediction for which the study finds empirical support in PSID data (Kaplan et al 2015). Essentially, the wealthy HtM cohort frequently behave in a similar manner to the poor HtM due to a lack of liquid funds.
It is notable that the analysis of seven major markets identified that the wealthy HtM make up a larger portion of the overall population that the poor HtM. The cohorts were remarkably similar across each of the advanced economies explored. Kaplan et al (2015) identified that the profiles of the N-Htm, W-Htm and P-HtM cohorts are broadly comparable across economies in terms of general demographics, and age profiles. Each nation evidenced a sizable Wealthy Hand to mouth population.
There are however a number of notable differences particularly in regard to Australia and the other cohorts. Over 40% of UK households were found to be hand to mouth (30% W-HtM) and a mere 15% were Hand to Mouth in Italy (with under 10% W-HtM). The UK, Canada and the US were the most similar of the countries within the study with large poor and wealthy hand to mouth populations.
Australia differs somewhat from the other countries in the study insofar as they have a very small proportion of poor Hand to Mouth but a very large portion of the population are wealthy hand to mouth. This classification is due to the long standing superannuation program in place in Australia. While Australians are more asset rich than Canadians, Americans and British citizens, they response to financial shocks and their propensity to consume is similar, as W-HtM and P-HtM citizens behave differently to N-HtM citizens.
Australians are not able to access their illiquid assets they are not able to use them to smooth financial shortfalls and navigate financial difficulty. The escalation of house prices over the last decade is contributing directly to the plausible creation of generations of Australian families falling into the Wealthy hand to mouth category, and more not being able to depart from the poor hand to mouth category.
Perhaps more concerningly, unlike many other OECD countries there is a concerning trend toward lower home ownership frequencies which will result in larger cohorts falling into the poor hand to mouth category. This is arguably the most concerning aspect of the decline in home ownership within Australia.
The most concerning aspect about this trend is that while W-htm and P-htm household behave in a similar manner in response to short term intertemporal shocks, plainly they both have limited capacity to absorb short term shocks easily, poor HtM households struggle with greater fiscal shocks and shortfalls. Both evidence a high MPC and both face significant financial instability and difficulty in smoothing their earnings to address their consumption needs. This results in an ever diminishing level of economic resilience within Australian households which in turn results in an increasingly unstable Australian economy.
Policy, Resilience, and the Future of Australian Households
Australia’s persistent pursuit of property-driven wealth has left its households uniquely exposed among advanced economies. While the nation is frequently regarded as asset rich, the composition of this wealth, concentrated in illiquid assets such as housing and superannuation, conceals significant vulnerability. The phenomenon of the “wealthy hand-to-mouth” household now affects a growing share of Australians, placing many families at risk of financial stress despite impressive net worth figures.
Current patterns of high personal indebtedness, encouraged in part by generous property investment incentives, have resulted in Australia ranking second only to Switzerland in household debt globally. Yet, unlike the Swiss, Australia’s asset base is less diversified and more heavily reliant on property, amplifying risks in the event of economic shocks or sustained downturns. The research literature and recent Reserve Bank of Australia findings highlight that while the banking sector may exhibit resilience, the underlying vulnerability of households is rising as more are pushed into hand-to-mouth status, whether poor or wealthy.
This changing household balance sheet structure has profound implications for economic resilience. A high proportion of families, unable to access liquid assets, are less able to smooth consumption during periods of job loss, health shocks, or macroeconomic volatility. The rising share of households with little or no liquid wealth, but substantial illiquid assets, means that much of the population may behave like the traditionally “poor” hand-to-mouth cohort; highly sensitive to income fluctuations and unable to buffer shocks. In the Australian context, this trend is compounded by falling rates of home ownership, signalling a risk that more families will become trapped in poor hand-to-mouth circumstances over time.
Policy responses must recognise that boosting net wealth alone is insufficient if it is not accompanied by measures that enhance household liquidity, improve access to financial buffers, and reduce barriers to converting wealth into stability. This demands a re-examination of incentives in the property and retirement systems, targeted efforts to expand access to home ownership, and a renewed commitment to social insurance mechanisms that can cushion families during economic shocks.
Ultimately, fostering true economic resilience for Australian households will require policy frameworks that not only support wealth accumulation but also ensure that families can weather adversity without risking their homes, livelihoods, or futures. Addressing the hand-to-mouth effect, both wealthy and poor, must be central to any strategy for building a more stable, equitable, and shock-resilient economy.