Australians have the world's second-largest household debts. 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 28 years since Australia's last recession in the early 1990s.

And it seems Australians have noticed the change.

Ninety per cent of the nearly 55,000 respondents to the ABC's Australia Talks National Survey rated household debt as a problem for the nation.

On an individual level, 37 per cent are struggling to pay off their own debts, with almost half of millennials reporting that debt is a problem for them personally.

So, where's all this borrowed money going?

Professor Roger Wilkins from Melbourne University is the deputy director of HILDA — the survey of Household Income and Labour Dynamics in Australia.

It is kind of like Australia Talks, interviewing 17,000 Australians about their lives and finances each year, but it follows the same households over time, so it can find out how their circumstances have changed.

Professor Wilkins says housing debt has more than doubled in real terms since HILDA was launched in 2001.

"So it's now averaging around about $350,000 for those who actually have mortgage debt, compared with around about $160,000 in 2002, 2001," he observes.

Using our homes to pay for our lifestyles

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 people who don't buy and sell their homes are increasing their debt. ( ABC News: Liz Pickering )

"Even for people who don't buy and sell a home, and stay in the one place, we're finding between 30 and 40 per cent of these people are increasing their debt from one year to the next," Professor Wilkins says.

"When people are increasing their debt from one year to the next, they're essentially accessing the equity in their home ... people are evidently using that increased equity to fund consumption.

"Now that consumption could take many different forms — it could be renovating the home, it could be going on holiday, buying a new car."

The problem is, after many years of a virtuous circle of rising home values on the back of rising debt, allowing further rises in home values and funding our lifestyles, to an extent the music has stopped.

"The banking system gets cautious about new loans, that's their first resort," explains Dr Ian Manning from National Economics, who co-authored a book on Australian debt titled Credit Code Red.

"Such things as reducing interest rates as a guaranteed way of increasing demand so that there's more employment, more housing, more purchase of housing and so forth, that no longer works."

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 either 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 debt creates cautious consumers

Economists are trying to understand why we're no longer responding to rate cuts in the same way we did previously by running out to the stores and spending.

A recent research paper by Reserve Bank economists offers one explanation.

"What this research from the RBA shows is that households that have a higher level of debt, even if they have the same level of wealth overall, are going to have lower levels of consumption," says Zac Gross, an economics lecturer from Monash University who used to work at the Reserve Bank.

Dr Gross says several studies from the United States, written after the global financial crisis, found that areas with higher household debts suffered more from the Great Recession.

Given Australians are amongst the world's most indebted people, it's no surprise then that we're not running to the shops.

Nation of cautious workers

But we're not just saving money by spending less, we're also trying to work more.

Professor Rachel Ong ViforJ from Curtin University has found that the increasing number of older Australians who have yet to finish paying off their mortgage are far more likely to remain in the workforce.

"If you're aged in your 40s, 50s or 60s and you've paid off your mortgage debt then the odds of you leaving the workforce is about four to five times higher than someone in the same age group who still has a mortgage debt burden," she says.

"A mortgagor who's in his or her 50s or 60s would increase their odds of staying in employment by 18 per cent for every $100,000 in increase in their mortgage debt."

It isn't just older people working more — women are also increasing their participation in the labour market.

From participation rates around 51-52 per cent in the early 1990s, a record 61.2 per cent of women aged 15 and over are now in, or looking for, employment.

Over the same period, participation by men has dropped slightly, from around 75 to 71.2 per cent, but by nowhere near as much as female participation has increased.

"The necessity for two income earners in the household has grown quite a lot over time," observes Professor Ong ViforJ.

"It is very difficult to service a mortgage home loan these days if you don't have two income earners in the family.

"If it's a single income earner then that person would have to be typically earning quite a lot above the average."

Higher labour force participation is generally considered good for the economy — more workers means more people with incomes, more spending, more taxes paid.

But, if there isn't enough work to go around, then more people competing for fewer jobs can mean lower wages growth — exactly what we've seen for the past few years.

Also possibly contributing to lower wages growth is risk aversion at work.

Treasury research has found Australians have become less likely to change jobs over recent years, and changing employer is a common way to get a pay increase.

"It's associated with more dynamism in the economy, that the economy's doing more to find better matches between workers and jobs, so if there's less job changing going on that can be reducing our productivity growth," says Professor Wilkins.

Economy flashes orange on debt risk

Dr Manning says the ultimate flow-on from continued high debt levels is the risk of a financial and economic crisis if Australia's overseas creditors get nervous about our ability to repay what we owe them on time and in full.

"If foreign lenders begin to take a dim view of Australia and, particularly, its banks, they'll be reluctant to reinvest, they may require a higher interest rate, they may, in the last instance, simply refuse, in which case you've got big problems," he says.

However, he says with Australian household debt levels currently plateauing and higher commodity prices lifting export incomes, the nation is currently not at imminent risk of financial catastrophe.

"Somewhere in orange range, not red," he says.

High risk, but not yet extreme.

The Australia Talks National Survey asked 54,000 Australians about their lives and what keeps them up at night. Use our interactive tool to see the results and how their answers compare with yours.

Then, tune in at 8.30pm on November 18, as the ABC hosts a live TV event with some of Australia's best-loved celebrities exploring the key findings of the Australia Talks National Survey.