RBA is hoping the current levels of household debt will not escalate. The levels of debt are manageable for the time being, but the governor of the Reserve Bank of Australia hopes that they do not climb much beyond their present level.
In a talk to the Western Sydney Business Connection yesterday, which surveyed current global and domestic economic conditions, Stevens noted that “households have serviced the higher debt levels very well. The arrears rates on mortgages, for example, remain very low by global standards. As a result the asset quality of financial institutions has remained very good.”
The debt to household income ratio stood at 156 per cent at December 2009, up from a post GFC low of 151 per cent earlier in 2009 and, apparently, continuing its steady climb. This ratio has doubled over 12 years and increased fourfold since financial deregulation commenced almost 30 years ago.
Governor Stevens would like to make sure that people do not get ‘carried away’ with borrowing in anticipation of future property gains as these are neither certain nor quantifiable.
“One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.”
“It may be,” Stevens said, “that many households have sensed this. We see at present a certain caution in their behaviour.” Stevens went on to cite modest growth in consumer spending (which he linked more to consumer caution than to the absence of last year’s stimulus payments), an increase in savings rates and wariness toward borrowing.
Stevens noted that increased interest rates must have certainly had the affect desired to bring debt appetite down but also said “the level of rates is not actually high by the standards of the past decade or two. We can’t rule out something more fundamental at work.
“We can’t know whether this apparent change will turn out to be durable. But if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing.
“Moreover if a period of modest growth in consumer spending helped to make room for the build-up in investment activity that seems likely, perhaps that would be no bad thing either.”