Household leverage may have peaked, house prices are falling, and credit conditions are tightening. The combination of the three should have all of us asking: what next?

The question is crucial because Australia is one of the few economies to have increased its debt burden since the global financial crisis. Household debt to GDP has tailed off a touch of late, but sits at record highs of around 120 per cent. The next nearest is Canada, at 100 per cent. We also have one of the highest household debt-to-income ratios in the world: 190 per cent. Five years ago it was 160 per cent.

The question is crucial because Australia is one of the few economies to have increased its debt burden since the global financial crisis. Credit:James Alcock

"Economic history shows that there is usually a consequence of a prolonged period of rapidly rising debt, the only question is: how bad will the consequence be?", Capital Economics chief Australia economist Paul Dales writes in a provocatively titled new report "Is a financial crisis looming?".

Yet the Reserve Bank remains stubbornly upbeat about the prospects for the Aussie economy. The central bank forecasts above trend growth that will facilitate a lift in inflation towards the middle of its target range, which will, in turn, allow the next rate move to be up, rather than down.