High household debt makes economy more sensitive to higher borrowing costs, experts warn
As the first rate-hike cycle in 13 years approaches, Australians’ household debt as a proportion of disposable income is at its highest level in history. Experts warn that this situation has made the economy more sensitive to higher borrowing costs.
At its meeting today, the Reserve Bank is expected to open the door to a cash rate hike later this year after underlying inflation hit the RBA’s target two years ahead of predictions, according to a report by The Australian. However, economists said that the massive uptick in home lending during the pandemic means that RBA Governor Philip Lowe will need to make sure any hike isn’t too severe – or risk stalling economic growth.
The ratio of owner-occupier housing debt to household disposable income passed 100% for the first time last year as property prices skyrocketed and Australians took on huge mortgages, The Australian reported. The ratio hit 103% by the September quarter, compared to less than 80% at the start of the last rate-hike cycle in 2009.
When investor mortgages, credit cards and personal loans are included, the total household debt to disposable income ratio is 185% – just below the previous peak in mid-2019, but about 25 percentage points above the level at the beginning of the 2009 rate-hike cycle, The Australian reported.
The national household debt burden will only have grown through the rest of 2021. RBA data released on Monday showed growth in the total level of owner-occupier housing credit rose by 9.6% over the year to December – the fastest pace since 2008.
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However, Jarden chief economist Carlos Cacho told The Australian that even with the spectre of rate hikes looming, “the economy is in a very good place.”
Cacho said that while three or four rate hikes “should be very manageable, hiking much above 1.5% could become a challenge, given the level of debt.”
“The RBA is not going to be hiking us into a recession – at least not intentionally,” Cacho said.
