Despite the Reserve Banks of Australia’s (RBA’s) positive economic growth outlook for this year and next, a senior official of the central bank warns that uncertainties remain in the economy’s domestic sector – especially with higher consumer debt.
During a keynote address at the CFO Forum held last week, RBA Deputy Governor Guy Debelle warned that Australians households have a relatively large amount of mortgage debt.
“This means that they are more likely to be sensitive to changes in income and interest rates. This poses risks to the outlook for the largest component of spending, household consumption,” Debelle said.
Debt has remained relatively high compared to income, according to Debelle, because income growth has been unexpectedly low. In the past decades, higher inflation was accompanied by higher wage growth. Because most mortgages are fixed in nominal terms, the debt level declined quite rapidly relative to a household's income when incomes were growing quickly, he said.
“Household income growth has been subdued for a number of years, which means that a number of households may be carrying a larger mortgage for longer than they expected when they took out the loan. While they can service the mortgage, it has consumed a larger share of their income for longer than they might have intended,” he added.
In response to the growing debt, regulators have introduced steps to improve resilience in households’ balance sheets – such as implementing tighter lending standards. For example, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission ensure that lenders' serviceability tests for new borrowers must use an interest rate of at least 7%.
“[H]ouseholds should be able to afford a mortgage rate well more than 2 per cent higher than it is currently (and remember, many households took out their loans when rates were higher than today),” the senior official added.
Debelle pointed out that arrears rates on mortgages remain low. “Even in Western Australia, where there has been a marked rise in unemployment and where house prices have fallen by around 10%, arrears rates have risen to around 1.5%, which is not all that high compared with what we have seen in other countries in similar circumstances and earlier episodes in Australia's history.”
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