Macroeconomics Seminar Series: The Effect of Higher Household Debt on Spending in Australia

We explore the relationship between mortgage debt and spending using detailed panel data on Australian households. We find evidence consistent with a “debt overhang channel” in Australia. In particular, households tend to cut back on their spending when they have higher levels of outstanding mortgage debt, with this effect being most apparent during the global financial crisis. The debt overhang effect is strongest for households experiencing 1) greater employment uncertainty, 2) binding liquidity constraints and 3) lower debt appetite. While we find evidence for a relationship between outstanding debt and spending at the household level, the effect on the macro economy is likely to be relatively small, particularly in non-crisis times.