Household debt hits hard.

 
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AUSTRALIA has the world's second-highest level of household debt.

We know it, we worry about it, and there is increasing evidence it is changing our way of life.

Hovering around 120 per cent of GDP - that is everything the nation produces in a year - Australia's household debt is second only to Switzerland, and we're not too far behind the Swiss.

It wasn't always like this, with that debt burden almost trebling in the past 28 years.

But not all of that housing debt has simply been used to buy homes - many people have been cashing in on the rising value of their properties over the past two decades. Even for people who don't buy and sell a home, and stay in the one place, between 30 and 40 per cent of these people are increasing their debt from one year to the next. This spending could take many different forms such as renovating the home, going on holiday, or buying a new car.

Reducing interest rates, as a guaranteed way of increasing demand, appears to be no longer working to help. The Reserve Bank has been learning this the hard way, with three interest rate cuts this year, on top of personal income tax cuts, so far having little positive effect on retail sales or the unemployment rate.

About the only thing the rate cuts have done to date is boost house prices, but it isn't clear yet whether that will be enough to restart that cycle of rising equity, more debt and increased spending, or even whether that would be a desirable outcome.

High levels of household debt tend to create cautious consumers but we're not just saving money by spending less, we're also trying to work more. There is an increasing number of older Australians who are yet to pay off their mortgage and as a result are more likely to remain in the workforce.

It isn't just older people working more - women are also increasing their participation in the labour market. From participation rates around 51-52per cent in the early 1990s, a record 61.2per cent of women aged 15 and over are now in, or looking for, employment. The necessity for two income earners in the household has grown quite a lot over time as it is very difficult to service a mortgage...

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