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Australians may be less sensitive to economic shocks as their holdings of liquid assets like cash and equities have increased in tandem with a property-fueled rise in household debt, according to Reserve Bank research.
It’s common to read that “higher housing prices and debt over recent decades has made the economy more financially fragile,” the RBA research paper said Wednesday. “But it is less well known that, as part of this process of balance sheet expansion, the of household liquid assets has also risen rapidly.”
Authors Gianni La Cava and Lydia Wang said the results suggest indebted households may be less at risk than thought of missing mortgage repayments.
Australia’s household debt is among the highest in the developed world and is typically viewed as a constraint on the RBA raising interest rates too far or too fast when it eventually begins tightening. Ultra-low borrowing costs during the pandemic have helped fuel a renewed surge in property prices.
The central bank says rates are likely to remain at a record-low 0.1% until 2024, though markets are pricing in hikes from next year.
The paper, titled “the Rise in Household Liquidity,” found that Australians generally aren’t over-extended even after a decades-long expansion of their balance sheets. That is largely due to the increased rate of housing-related savings aided by lower interest rates, it said.
“To the extent that more liquidity is associated with less financial stress, our results suggest that the higher ratio of debt-to-income has not made the household sector more financially fragile,” the paper said.
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