Households at high risk

World central bank warns Aussie homeowners most exposed

AUSTRALIAN homeowners are the most exposed in the world to any increase in interest rates, a new global report out today warns, saying debt and high house prices are a key risk to the country.

The Bank for International Settlements, effectively the central bank to the world’s central banks, yesterday issued the warning that even a modest run-up in interest rates could leave many Australian households in a precarious financial position.

Australian households are already considered the second most indebted in the world, only behind Switzerland. Household debt is now approaching double the level of household disposable income.

Markets now believe the next move in official interest rates will be an increase sometime next year.

A quarter percentage point increase in rates `would add more than $40 a month to a $300,000 mortgage.

But the BIS looked at traditional interest rate movements and what that would mean to a variety of countries, including Australia.

If interest rates increased in line with market expectations then Australian debt servicing levels would have to double in a development that would crimp the spending patterns of many homeowners.

And if rates had to be pushed up even quicker than debt repayment levels would triple - and go past the level that was experienced by homeowners just ahead of the Global Financial Crisis when standard vari- able interest rates climbed beyond 9 per cent.

Current standard variable rates are about 4.5 per cent.

“In countries that experienced rapid rises in household debt over recent years, debt servicing ratios are already above their historical average and would be pushed up further by higher interest rates,” the bank warned.

“This could act as a signifi- cant drag on consumption and output.”

The only other households facing similar repayment pressures comparable to Australia would be those in Norway.

The BIS said Australian banks would start to feel financial pressure if interest rates increased by 2.5 percentage points. That would take mortgage rates back to their longrun “normal” level.