5 To what extent are families over-indebted?
High levels of debt are not necessarily a problem, provided adequate income is available for debt servicing. In this section we attempt to estimate the proportion of non-partnered individuals and couples who appeared to have problem debt in 2003/04. This required us to define a critical level of debt above which it could be regarded as a “problem”, recognising there will be a certain inevitable arbitrary element in whatever threshold is chosen. We define those with debt levels exceeding this threshold as “vulnerable”. We construct a measure that relates debt servicing obligations to income and present the basic descriptive statistics (Section 5.1). In Section 5.2 we explore the factors associated with high levels of debt servicing in relation to income. In Section 5.3 we take a further step to narrow in on those most at risk, recognising that many of those with high debt servicing costs relative to their income have the ability to reduce these costs if they become unaffordable. We introduce a measure to estimate the proportion of families most “at risk” due to high debt servicing obligations that takes into account overall net wealth. We classify those with high debt servicing costs in relation to their income and negative net wealth as most at risk. In Section 5.4 we repeat the analysis under the assumption that those with student loans have a corresponding asset that is at least equal to the value of the student loan. In the final section (5.5) we analyse the impact of unexpected shocks on our estimate of the proportion of the population most at risk.
