High household debt poses economic risk

Posted: 22 February 2017 3:51 pm

housing economic riskHousing affordability and its ongoing effects on inflation are major concerns for central banks in both Canada and Australia.

Speaking at the Australia-Canada Economic Leadership Forum, Reserve Bank of Australia (RBA) governor Philip Lowe spoke about the similarities between the Australian and Canadian economies.

In discussing how both central banks are trying to tackle the continuing concern of inflation, Lowe pointed out that the RBA is looking at medium term solutions rather than long term. He noted that growing household indebtedness is a risk that needs to be considered when looking at policies to help tackle inflation.

“At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment,” Lowe said.

Lowe highlighted the similarities in the concerns and issues facing both nations when it came to their respective housing markets and household debt.

“In both countries the ratio of household debt to income is at a record high, although the low level of interest rates means that the debt-servicing burdens are not that high at the moment,” Lowe said in his speech.

Lowe did note, however, that “households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades”.

This, he suggested, has come as a sobering combination for many who are seeing the potential of rate changes in the future daunting when planning household budgets.

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