The Reserve Bank remains fairly confident in the Australian economy despite exploding mortgage debt.
Positive employment figures and the robust economy are providing the RBA assurance that the household debt that has been built in the country is not about to collapse.
Household debt in the country has been climbing sharply since the early 1990s and the ratio of household debt to income has now risen to 190 per cent.
In a speech this week the RBA’s Michele Bullock said that while the risks are high there are a number of factors that suggest widespread financial stress among households is not imminent.
Ms Bullock said one of those reasons was that it’s the wealthier households that hold most of the total debt as well as households with people aged 35-44 who are the highest earning age bracket.
Interestingly, Ms Bullock also pointed to the fact that even though interest rates have dropped over the last few years, households have largely been able to keep their repayments steady.
Ms Bullock acknowledged that rising household debt was a problem and that the central bank will continue to monitor it closely.
“If there was an adverse shock to the economy, households could find themselves struggling to meet repayments on these high levels of debt,” she said.
“If they have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans.”
In the event of higher interest rates, Ms Bullock said that the RBA’s data “suggests that most borrowers will either be able to meet these higher repayments, refinance their loans with a new lender, or extend their interest-only terms for long enough to enable them to resolve their situation.”
“So far, the evidence suggests that the transition of loans from interest-only to principal-and-interest repayments is not having a significant lasting effect on banks’ housing loan arrears rates.”
Ms Bullock added that tighter banking regulations of late had lifted lenders’ capital buffers and improved lending standards and that overall arrears levels are very low.