Do Australian Households Borrow Too Much?

Tonight’s subject is one that has attracted increasing attention over recent years – namely, the growth of household debt. There is no doubt that this debt has grown quickly over the past decade, and this has prompted a number of people to suggest that it is too high and that it presents a threat to the future health of the economy. What I would like to do tonight is to examine household debt from several perspectives in order to form a judgment on whether its current level poses risks for the economy, and what those risks might be. My broad conclusion is that a proportion of households have clearly taken on more risk, which has increased the risk profile for the sector as a whole. This is likely to make household consumption more sensitive to changes in economic circumstances than it formerly was, but the overall risk for the economy has not gone up to the extent that would be indicated by the rise in the level of debt or in the debt to income ratio. The subject of household debt is one that we at the Reserve Bank have been thinking about, and writing about, for some time. Over the past year, we have produced a number of studies on debt and housing, which have laid out the main facts. I will summarise them briefly, before moving on to the more difficult task of making judgments about their economic significance. Those who want more detail can consult the studies listed below.1