Disinflation and the dynamics of mortgage debt - BIS Papers No 22, part 2 April 2005

A permanent reduction in average inflation should be expected to reduce nominal interest rates on deposits and loans by the same amount. Together with financial deregulation, which reduced interest margins and made housing finance more accessible, the reduction in nominal interest rates in Australia since the 1980s has eased the initial repayment burden of a given-sized debt. Households have therefore taken advantage of their increased capacity to borrow, resulting in rapid growth in household debt over the past decade or so, as shown in Graph 1. Consequently, the ratio of household debt to disposable income in Australia has increased from a level well below that in other developed countries, to something close to the upper end of the range of international experience.