Small shock could trigger ‘serious correction’, warns RBA

Reserve Bank of Australia governor Philip Lowe is worried about what will happen to highly leveraged Australian households when rates return to “normal” levels.

Speaking at an American Chamber of Commerce in Australia (AMCHAM) event in Perth on Thursday (21 September), the RBA governor shared his concerns around sluggish wage growth and record levels of household debt.

Adding to these fears is the recovery in the global economy, a positive development that “does carry risks”, Mr Lowe said.

“It is a sign that economic growth in the advanced economies has become self-sustaining, rather than just being dependent on monetary stimulus," the bank governor said. "It would also lift the return to many savers who have been receiving very low returns on interest-bearing assets for a decade now.

“On the other side of the ledger, periods of rising interest rates globally have, historically, exposed over-borrowing somewhere in the global system. Investment strategies that looked sensible when interest rates were very low tend not to look so good when interest rates are higher.”

Property investment and imbalances in the mortgage market have been on the RBA’s radar since 2014. The central bank’s fears triggered APRA’s macro-prudential measures that continue to impact residential lending.

This week, Mr Lowe questioned “how we deal with the higher level of household debt and higher housing prices, especially in a world of more normal interest rates”.

He noted that higher levels of household debt are likely to change household spending patterns.

He said: “Having increased their borrowing, households are less inclined to let consumption growth run ahead of growth in incomes for too long.

“Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to.”

One issue that the Reserve Bank has focused on is the build-up of medium-term risks from growth in household debt persistently outpacing that in household income.

“Our concern has been that, in this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets,” Mr Lowe said.

“We have been working with APRA through the Council of Financial Regulators to address this risk. The various measures are having a positive impact in improving the resilience of household balance sheets.”

Mr Lowe’s comments follows those made this week by RBA assistant governor Luci Ellis, who warned that even the best lending standards might not be enough to protect borrowers and lenders from an economic shock.

[Related: Best lending standards 'might not be enough': RBA]

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