Abstract
AbstractHousehold indebtedness has increased substantially in Australia. We consider how significant a risk this debt poses. Our results suggest that banks appear resilient to a severe downturn, thanks to moderate loan‐to‐valuation ratios on residential mortgages and generally sound lending criteria. Household debt seems to pose a bigger risk to consumption, since a large but plausible decrease in asset prices could precipitate a substantial decrease in consumption. Moreover, the increase in indebtedness over the past decade has slightly increased the potential decline in consumption. However, the distribution of debt across households appears to slightly mitigate these risks.
Highlights
Household debt levels have increased considerably over the past 30 years, both in Australia and elsewhere
The macroeconomic scenario leads to household debt-at-risk as a share of housing debt increasing by only a small amount, from 0.8 per cent to 2.1 per cent (Figure 8)
Given the current level of household debt relative to income in Australia is high compared to many other countries, and its own history, these risks are often highlighted for Australia
Summary
Household debt levels have increased considerably over the past 30 years, both in Australia and elsewhere. Concerns about the risks posed by household debt appear regularly in the press, and in reports from financial analysts and global institutions (such as the Bank for International Settlements and International Monetary Fund) These concerns have been heightened by the deep global contraction induced by COVID-19. Jordà, Schularick and Taylor (2013) and Mian, Sufi and Verner (2017) conclude that recessions preceded by rapid credit growth tend to be deeper than others, even when the financial sector remains solvent. These outcomes appear to be primarily driven by high levels of household, not business, debt (Jordà et al 2013)
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