High levels of household debt fuelled by record low interest rates and easy access to finance are particularly prominent in Australia’s real estate market, the Reserve Bank has warned.
The central bank’s board was briefed on the household debt bubble at its most recent meeting a fortnight ago and, in detailed discussion, agreed that the debt exposure made households “more vulnerable to economic shocks”.
In the minutes from the RBA board meeting on July 3, members were told that the global growth in household debt levels had outweighed household income for the past three decades – a trend that was particularly notable in Australia.
“Two key drivers of this trend across countries have been the decline in nominal interest rates … lower inflation and financial deregulation both of which have increased households’ access to finance,” the minutes noted.
Amid a rush in recent years by “mum and dad” investors to pump money into real estate, the RBA signalled that many ordinary borrowers are extremely exposed to fluctuations in the housing market and the economy.
“A distinguishing feature of the Australian housing market is that the bulk of dwellings are owned by the household sector,” the minutes observed.
“Households with high debt levels are more vulnerable to economic shocks and therefore likely to reduce consumption in the face of uncertainty about their future income.
Not if, but by how much
Housing forecasts have gone from disagreement over whether home prices will fall to debates about how much they’ll decline. “Accordingly, members agreed that household balance sheets continued to warrant close and careful monitoring.”
The RBA noted that housing prices have fallen in Sydney and Melbourne after surging in recent years, with most of the falls for more expensive properties.
Otherwise, housing prices have been “fairly steady”, with the exception of Hobart where prices have picked up on supply constraints.
The RBA noted that risks to the global growth outlook have increased with fresh trade barriers likely to extend beyond the United States and China.
“An extension of trade tensions could harm global growth by undermining confidence and delaying investment decisions and could dampen international trade,” the RBA warned.
The minutes do not specifically mention US President Donald Trump, whose unpredictable comments have fuelled speculation about a damaging global trade war.
The RBA left the cash rate on hold at 1.5 per cent for the 23rd consecutive month and many economists are not factoring in a rate rise until 2020.