Philip Lowe concerned about link between rising household debt and house prices and the possibility of ‘future sharp cuts’ in spending from those in debt

This article is more than 3 years old

This article is more than 3 years old

The Reserve Bank governor, Philip Lowe, has warned the rise in household debt has made Australia’s economy less resilient to future shocks.

He said some households were carrying such high levels of debt relative to income that they may respond to a future economic shock by sharply cutting spending.

In a speech to the Economic Society of Australia on Thursday, Lowe said he was concerned about the link between rising household debt and house prices, though not because he thought the banking system risked becoming unstable.

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He said Australia’s banks were “soundly capitalised” and recent stress tests confirmed they were resilient to large movements in residential property prices.

Rather, he said the RBA was concerned about the possibility of “future sharp cuts in household spending” from highly indebted households.

Given the high levels of debt and housing prices, relative to incomes, it was likely some households could respond to a future shock to income or housing prices by deciding they had borrowed too much, he said.

“This could prompt a sharp contraction in their spending, as they try to get their balance sheets back into better shape.

“An otherwise manageable downturn could be turned into something more serious,” he warned.

Lowe’s warning comes just five days before the federal budget, in which the government is expected to announce plans to charge foreigners up to $5,000 for leaving their Australian apartments empty.

The government is also reportedly planning to ban foreigners from buying more than half of the apartments in new apartment builds, in a bid to help more Australians buy their first property.

Lowe said the RBA was mindful of the changes that have occurred in the economy in response to rising house prices and household debt.

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He said in earlier periods of rising housing prices, the household sector withdrew equity from their housing to finance spending, but today, households were much less inclined to do this.

“Many of us feel that we have enough debt and don’t want to increase consumption using borrowed money,” Lowe said.

He said his overall assessment was that the economy had become less resilient to future shocks as house prices and debt have risen.

“Given this assessment, the Reserve Bank has strongly supported the prudential measures undertaken by the Australian Prudential Regulation Authority [Apra],” he said.

“Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy. Nor can a high concentration of interest-only loans.”



But Lowe said he also believed the balance between supply and demand in Sydney’s and Melbourne’s property markets would become better balanced “over time”.

He said the increased rate of home building, and investment in transport, would put downward pressure on prices and rents.

“[But] to the extent that, over time, a better balance is established, we will be better off not incurring too much debt, and having housing prices go too high, while this is occurring,” he warned.

“In the current environment, the resilience of our economy would be enhanced by an extended period in which housing prices and debt outstanding increased no faster than our incomes.”