RBA: How risky is Australian household debt?

The Reserve Bank of Australia (RBA) is out with its latest research discussion paper, evaluating the risks attached to the Australian household debt.

Key takeaways

“Fundamental factors (higher real incomes, a fall in nominal interest rates, financial liberalization and household ownership of the rental stock) mostly account for the current level of household debt; 

Banks appear resilient to a severe downturn thanks to moderate loan-to-valuation ratios on residential mortgages; 

And the distribution of debt does not appear to heighten wealth effects on consumption. 

However, there are risks. Our model cannot account for the increase in debt over the past four or five years. In addition, we demonstrate that a large but plausible fall in asset prices could lead to a substantial fall in consumption and that the increase in indebtedness over the past decade has slightly increased the potential loss of consumption during periods of financial stress.”