RBA's Bullock Sees Potential Vulnerabilities From Household Debt

(Bloomberg) -- Australia’s high household debt is a potential risk to banks and the wider economy, though there are significant buffers protecting households from financial stress, Reserve Bank Assistant Governor Michele Bullock said.

In recent decades, Australia debt-to-income ratio has risen to be in the top quarter of developed economies, Bullock, who oversees the financial system, said in the text of a speech in the regional city of Albury-Wodonga Monday.

“This raises potential vulnerabilities in both bank and household balance sheets,” she said. “While the risks are high, there are a number of factors that suggest widespread financial stress among households is not imminent. It is nevertheless an area that we continue to monitor closely.”

A key mitigating factor is that about two-thirds of the debt is held by the wealthiest 40 percent of households; on top of that, the RBA has consistently noted that borrowers have been using low interest rates to pay down their mortgages quicker and build up financial buffers. At the institutional level, Bullock said Australian banks are well capitalized and have tightened their lending standards.

Australia’s household debt-to-income ratio is at a record 190 percent, fueled in recent years by the central bank cutting rates to a record low 1.5 percent. That contributed to a surge in house prices that required larger mortgages to finance purchases. Regulators have sought to limit mortgages to property investors, which has helped cool prices.

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