Household debt now ‘at record high’

By Francesca Krakue

February 24 2017
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The governor of the Reserve Bank has flagged serious concerns that Australian households are now carrying much more debt than before, pointing to soaring property prices as a major catalyst.

Distressed couple seeking financial help

Speaking at the Australia-Canada Leadership Forum, RBA governor Philip Lowe said the interaction between consumption, saving and borrowing for housing is a “significant issue” that the bank is “watching carefully”.

“It is one of the key uncertainties around our central scenario for the Australian economy. We are still learning how households respond to higher debt levels and lower nominal income growth,” Mr Lowe said.

He said an increase in housing prices has gone “hand in hand” with an increase in household indebtedness.

“The ratio of household debt to income is at a record high,” Mr Lowe said, noting that the low level of interest rates means debt-servicing burdens are not that high at the moment.

He said the Australian housing sector is coping “reasonably well” with the high levels of debt. However, there are signs debt is affecting household spending.

“In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination.”

Mr Lowe said the RBA’s latest forecasts were prepared on the assumption that growth in consumption is unlikely to surpass growth in household income in the next couple of years, differing from recent years where the rate of saving had trended down slowly.

Inflation targets are ‘not rigid straightjackets’

Mr Lowe said Australia has experienced low rates of inflation for a few years now, underpinned by a few underlying factors.

Wage growth has been subdued due to the “ongoing slack” in the labour market. Downward pressure on retail prices has also intensified competition, which has affected food prices, with new entrants and overseas retailers in particular putting downward pressure on the prices of a range of goods.

“We are both expecting inflation to increase, but only gradually so. In our case, we expect the disinflationary effects of the earlier decline in commodity prices and the competitive pressures in retailing to wane,” Mr Lowe said.

“Some pick-up in wages growth is also expected, although wage increases are likely to remain below average for some time yet. Our liaison with businesses does not suggest that a pick-up in wage growth is imminent, but nor does it suggest that a further slowing is in prospect.”

In light of this, Mr Lowe emphasised that flexible inflation targeting with a medium-term focus continues to be the right monetary policy framework for Australia.

“Inflation targets are flexible, not rigid straightjackets. In our case, the emphasis is very much on medium-term outcomes, rather than the outcome over any particular period,” he concluded.

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