In her address to the Ai Group on Monday (10 September), RBA assistant governor Michele Bullock flagged the risks associated with high levels of household debt, pointing to Australia’s debt-to-income ratio of 190 per cent, compared to the global median of 130 per cent, as revealed by RBA and OECD statistics.
Ms Bullock claimed that the rise in household debt has been “largely driven” by a rise in mortgage debt, partly due to household ownership of rental stock.
“Australians borrow not only to finance their own homes but also to invest in housing as an asset,” the assistant governor said.
“This is different to many other countries where a significant proportion of the rental stock is owned by corporations or cooperatives.”
Ms Bullock added that continually high levels of household debt could pose “credit quality issues” that could raise “potential vulnerabilities” for both banks and borrowers.
“[Mortgage] lending is such an important part of bank balance sheets in Australia, [so] any difficulties in the residential mortgage market could translate to credit quality issues for banks,” Ms Bullock continued.
“Since all of the banks have very similar balance sheet structures, a problem for one is likely a problem for all.
“Australian banks have substantially increased their exposure to housing over this period and housing credit now accounts for over 60 per cent of banks’ loans. So, the Australian banking system is potentially very exposed to a decline in credit quality of outstanding mortgages.”
Despite acknowledging that arrears rates on mortgages “remain very low”, Ms Bullock warned that high household exposure to mortgage debt could heighten mortgage serviceability pressures in the event of an “adverse shock” to the economy.
“If they [households] 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,” the RBA governor added.
“This could have adverse effects on the real economy — for example, in the form of lower economic growth, higher unemployment and falling house prices, which could, in turn, amplify the negative shock.”
Ms Bullock noted that mortgage “buffers” created off the back of low interest rates and mortgage offset accounts could help reduce such risk, but claimed that “risks nevertheless remain high”, stating that the “aggregate picture is obscuring rising vulnerabilities for certain types of households”.
The Reserve Bank governor also pointed to recent rises in interest rates, claiming that such increases are likely to place further pressure on households.
However, Ms Bullock said that she believes the “situation is not as severe as the numbers suggest”, pointing to “above trend” growth in the economy, mortgage buffers and improved lending standards.
Ms Bullock also claimed that the recent fall in property prices, coupled with tightened lending standards, is “unlikely to result in a widespread credit crunch”.
“The main reason is that most households do not borrow the maximum amount anyway so will not be constrained by the tighter standards,” Ms Bullock said.
“While the changes to lending standards have tended to reduce maximum loan sizes, this has primarily affected the riskiest borrowers who seek to borrow very close to the maximum loan size and this is a very small group. Most borrowers will still be able to take out the same-sized loan.”
[Related: Mortgage serviceability pressures mounting]