Household debt is the total consumer debt that the people in a single household have accrued. It includes mortgage debt in addition to credit card debt, car loans, student loans and other outstanding non-business loans. Over the past two decades, household debt has risen substantially in many developed countries, even as household income has remained steady or even declined.
Mortgage Debt
Guy Debelle, author of "Household Debt and the Macroeconomy," writes that in recent years in the United States, United Kingdom, Australia, Japan, the Netherlands, Denmark, France, Germany and Italy, "the bulk of the increase in household debt has been in the form of borrowing for housing." Mortgage debt typically represents about 75 percent of total household debt in the United States and as much as 85 percent of the household debt in Australia, according to Debelle. Mortgage debt is directly tied to its holder's available income. In a sound economy, home equity increases as the mortgage debt is paid down. When property values decline across the housing market, the value of home equity also falls.
Consumer Debt
Low interest rates on borrowed money have played a large part in increased household consumption--or consumer debt--since the 1990s. Because people had easy access to consumer credit, there were far fewer monetary restrictions for households. Consumer credit provides households with the direct means to make desired purchases without waiting to earn the money first. In 2009, average household credit card debt in the U.S. was $5,100, according to Money-Zine.com. By the end of 2010, that number was projected to be about $6,500 per household.
Debt Service Ratio
The Federal Reserve analyzes a household's debt service ratio to find out the ratio of the average household's debts to its disposable income. The measurement takes into account a household's total debts in addition to the costs related to maintaining those debts. For example, a household with a mortgage also must pay for property insurance and a household with a car loan must also pay for automobile insurance. The study also considers loan and credit card interest as a necessary cost to fund consumer debt. In June 2008, 14 percent of the average household's disposable income went toward mortgage, credit card and personal loans. About 18 percent of homeowners' disposable income paid the costs of home and car ownership while renters spent about 25 percent of disposable income on housing and car expenses.
GDP
The gross domestic product (GDP) of the United States is a measurement of the country's economic output. Simply put, the national economy is strongest when debt is low and economic output is high. In an interview with NPR in February 2009, Professor David Beim of the Columbia Business School stated that beginning in 2007, consumer debt equaled the GDP for the first time since 1929, when the Great Depression hit. Beim said that "currently, consumers owe $13 trillion when GDP is $13 trillion." The average household's standard of living has risen very quickly, funded by borrowed money.
Expert Insight
The McKinsey Global Institute issued an extensive report on the effects of household debt on the wider economy, as highlighted by HeraldNet.com. The report states that it's erroneous to only consider a household's debt-to-equity ratio rather than it's debt-to-equity-to-income ratio, as was often the case in the past. It goes on to state that increasing "housing prices meant that the ratio of household debt to assets appeared stable. ... But household debt compared with disposable income increased significantly, which should have raised a red flag."
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