The governor of the Reserve Bank has warned that policymakers should not be encouraging Australians to take on higher levels of debt, even though most households seem to be managing at the moment.
Dr Philip Lowe told a gathering of economists in Melbourne that even though he is not predicting difficult times ahead, “we need to watch things carefully” given the high and rising levels of debt.
Speaking at the annual dinner for the Committee for Economic Development of Australia on Tuesday, Lowe said he remained optimistic about the health of Australia’s economy, because low interest rates were still supporting growth and the rise in the terms of trade would boost incomes and government revenues.
He said the economy was also adjusting better than many predicted to the unwinding of the mining investment boom.
But he said it would be prudent to use this time to build some buffers into the system against future economic shocks.
With this in mind, he would like to see households continue to repair their balance sheets – including not taking on much more debt.
“Debt levels, relative to income, are high in Australia and are much higher than they once were,” he said. “Currently, household debt is equivalent to 185% of annual household disposable income, a record high and up from around 70% in the early 1990s.”
Most households seemed to be managing the higher levels of debt, he said, thanks to the low level of interest rates and ongoing employment growth.
“But many feel that they are closer to their borrowing capacity than they once were and have adjusted their behaviour accordingly,” he said.
“Since the financial crisis, there has been a noticeable increase in the household saving rate. We are not using our houses like ATMs in the way that we were in the decade to the mid-2000s.
“Gone are the days when higher housing prices were a sign that we should go to the bank and borrow more to spend.”
Lowe said one illustration of this change in household behaviour was the large increase in balances held in mortgage offset accounts and redraw facilities.
“In aggregate, households now have balances in these accounts equivalent to 17% of total outstanding housing loans, which is a buffer worth 2.5 years of scheduled repayments at current interest rates,” he told the audience.
“Over recent years more households in all income brackets have got ahead on their mortgages.
“This more prudent behaviour is a positive development. Given the high and rising levels of debt, though, we need to watch things carefully.
“It is unlikely to be in the public interest, given current projections for the economy, to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term.”
Lowe’s speech comes hours after the International Monetary Fund said Australia’s economy could expect a better performance if the recent improvement in the terms of trade boosts business confidence and unlocks investment.
