RBA has sounded the household debt alarm; here’s why

Highlights

  • Australia’s housing debt has been rising aggressively and the RBA has voiced concerns about the same.
  • Stringent mortgage lending standards and sufficient bank capitalisation could protect lenders, should the country face another economic turmoil.
  • Loan-to-valuation and debt-to-income ratios are closely monitored by the RBA and the Australian Prudential Regulation Authority. 

The Reserve Bank of Australia (RBA) has alerted the nation on its rising household debt, which could de-stabilise the economy. The unabated surge in household prices could backfire on the banks and its lenders if the economy faces another deep recession.

In a conservation with Bloomberg, RBA assistant governor Michele Bullock said, “high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices.” Clearly, along with rising household prices, any potential turmoil in the economy could trigger a potential loss for banks.

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Already, the country’s household debt has ballooned to one of the highest levels across the world. Analysts fear the debt could soar to record levels on the back of runaway household prices. Also, stagnant wage growth has elevated debt-to-income ratio, escalating the risk. Loan-to-valuation and debt-to-income ratios are closely monitored by the RBA and the Australian Prudential Regulation Authority. 

The governor also added, “However, while household debt to income in Australia hasn’t increased much over recent years, it is at a high level, both historically and relative to other countries. So sustained strong growth in credit in excess of income growth may result in vulnerabilities building in bank and household balance sheets”.

However, Bullock also said that mortgage lending standards have been stringently followed across the banking sector and sufficient bank capitalisation could protect lenders should the country face another economic turmoil.

The RBA has also envisioned a scenario wherein a correction in the record high housing prices could lead to extended loss in income for highly leveraged households. This could prove to be disruptive for homeowners and force them to sell their homes. If the value drops substantially from the highs, the banks will incur significant losses, which if widened beyond the bearable capacity, could result in a massive impact on the entire financial system. The impact could trickle down to other sectors, leading to a lowered consumption across the economy

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Bottom Lime

The country’s housing debt in is hitting the roof, escalating the risk of a severe correction of sky-high prices, which could pose a serious risk for banks and lenders. However, the RBA is keeping a close watch and affirms that the banks are sufficiently capitalised to absorb the impact.    

Read More: Interest Rate Decisions To Further Aid Housing And Demand?

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