Household debt risk to bank sector
Growing household debt is the single biggest risk to the nation’s entire financial system, the Reserve Bank has warned while also cautioning Perth homebuyers to expect some more price pain in coming months.
The bank used its six-monthly review of the strength of the finance sector, which covers banks to insurance companies, to highlight its unease about the level of debt being carried by many Australian homeowners.
Australian households are among the most indebted in the developed world on the back of low interest rates which have in turn pushed up housing prices in many of the nation’s big cities.
While the RBA argued its efforts, along with bank regulators, to improve lending standards on top of the improving finances of many people were stabilising the overall system, there were clear concerns about total household debt.
“Household indebtedness, most of which is mortgage borrowing, is high and gradually rising against a backdrop of low interest rates and weak income growth,” it said.
“While some households have taken advantage of low interest rates to make excess mortgage payments, others have increased their borrowing.
“Higher interest rates, or falls in income, could see some highly indebted households struggle to service their debt and so curtail their spending.”
It also warned that Perth house prices in particular parts of the city were likely to fall a little further in coming months.
It said the high level of home and corporate vacancy rates were also weighing on the city.
“Weak conditions in WA and a significant increase in new apartment building in Brisbane have increased the potential for further localised housing price corrections,” it said.
CommSec chief equities economist Craig James said the Reserve Bank believed the financial system had strengthened.