Borrowing restraint suits Stevens
The household debt burden at present may be manageable, but the governor of the Reserve Bank of Australia hopes that it does not climb much beyond its present level.
In a talk to the Western Sydney Business Connection yesterday, which surveyed current global and domestic economic conditions, Stevens noted that "households have serviced the higher debt levels very well. The arrears rates on mortgages, for example, remain very low by global standards. As a result the asset quality of financial institutions has remained very good."
The debt to household income ratio stood at 156 per cent at December 2009, up from a post GFC low of 151 per cent earlier in 2009 and, apparently, continuing its steady climb. This ratio has doubled over 12 years and increased fourfold since financial deregulation commenced almost 30 years ago.
"So, to be clear," Stevens continued, "my message is not that this has been a terrible thing", a sentence that in the website version the RBA took the trouble to highlight in bold.
Stevens followed this observation with some sort of warning.
"But that doesn't mean it would be wise for that build-up in household leverage to continue unabated over the years ahead.
"One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks - such as a fall in income - to a greater extent than would be prudent."
"It may be," Stevens said, "that many households have sensed this. We see at present a certain caution in their behaviour." Stevens went on to cite modest growth in consumer spending (which he linked more to consumer caution than to the absence of last year's stimulus payments), an increase in savings rates and wariness toward borrowing.
Stevens noted that increased interest rates must have dampened borrowing demand but also said "the level of rates is not actually high by the standards of the past decade or two. We can't rule out something more fundamental at work.
"We can't know whether this apparent change will turn out to be durable. But if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing.
"Moreover if a period of modest growth in consumer spending helped to make room for the build-up in investment activity that seems likely, perhaps that would be no bad thing either."