Finance Your Budget RBA: household debt a drag but property prices mean no more rate cuts

RBA: household debt a drag but property prices mean no more rate cuts

Lowe debt warning
Philip Lowe warns on debt. Photo:AAP
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Reserve Bank governor Philip Lowe has warned that debt levels are affecting household spending in Australia, describing the trend as “a sobering combination”.

Speaking in Sydney this morning, Dr Lowe said some households are carrying “more debt than they have before”, while slower income growth puts pressure on their ability to service loans.

And, despite the effect on spending of that debt, booming house prices are restricting the bank from cutting rates further despite that being its preference.

“We are trying to balance multiple objectives at the moment,” he said in response to questions after the speech.”

“We’d like the economy to grow a bit more quickly and we’d like the unemployment rate to come down a bit more quickly than is currently forecast.” But the bank feels its hands are tied because it doesn’t want to boost housing prices, and consequently debt, further

“It is possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets,” Dr Lowe warned.

“At some point in the future households, having decided that they have borrowed too much, might cut back consumption sharply.”

Dr Lowe delivered the reality check at the Australia Canada Economic Leadership Forum, where he said low interest rates made it attractive for borrowers in both countries to invest in real estate.

But he said both central banks were “watching carefully” for signs of stress in the interaction between consumption, saving and borrowing.

“It is one of the key uncertainties around our central scenario for the Australian economy,” Dr Lowe said.

“It is difficult to quantify this risk but it is one that is difficult to ignore.”

Dr Lowe’s comment come amid concerns about dangerous potential real estate bubbles in Sydney, Melbourne and Brisbane, fueled by record low interest rates.

Last week, the Commonwealth Bank announced an out of cycle rate rise for investor loans to keep within guidelines from the Australian Prudential Regulation Authority.

Dr Lowe is expected to face more scrutiny on the outlook for interest rates and the broader economy when he faces the House of Representatives Economics Committee on Friday.


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