IMF flags risks on high household debt

The International Monetary Fund (IMF) has warned about Australia's high level of household debt amid rising house prices.

In a statement, the IMF suggested macroprudential policies be tightened to address the gradually rising financial stability risks in Australia.

"While the surge in housing prices has been driven largely by owner-occupiers taking advantage of low mortgage rates and fiscal support programs, high debt-to-income mortgages are on the rise amid elevated household debt, and investor demand has begun to increase from low levels," IMF said.

Under IMF's recommendation, lending standards should be monitored closely and measures should be taken to limit the increase in household debt.

"Options include increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios.”

Policies targeted at highly-indebted borrowers

Reserve Bank of Australia (RBA) assistant governor Michelle Bullock recently said the increasing house prices, while a strong feature of the economy, has resulted in a sustained growth in credit that goes beyond income could result in vulnerabilities.

"Unlike in 2014 and 2017, the concerns this time are not specific types of lending such as investor or interest only lending," Ms Bullock said.

"This suggests that if there were to be a need for so-called macro-prudential tools to address rising risks, they should be targeted at the risks arising from highly indebted borrowers."

Tools that address serviceability of loans and the amount of credit that can be obtained by individual borrowers are, Ms Bullock believes, more likely to be relevant in the current context of the market.

“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices.”

Reforms to housing

To keep indebtedness in check and ensure the affordability of the market, IMF also recommended looking at policies surrounding housing.

The IMF said more efficient planning and zoning policies and better infrastructure will be able to improve housing supply.

"Commonwealth and state/territory governments should consider providing more financial incentives for local governments to streamline zoning regulations and improve infrastructure," it said.

"Promoting flexible work arrangements could allow workers to move away from capital cities, improving affordability. In addition, governments should focus on providing targeted fiscal support for low-income households and expand social housing."

Rising house prices boosting household wealth

Recent data from the Australian Bureau of Statistics (ABS) showed a 5.8% increase in the total household wealth over the June quarter, with the wealth per capita reaching a record high of $522,032.

House prices contributed significantly to this growth.

In fact, residential property assets contributed 4.5 percentage points to the quarterly growth in household wealth, followed by superannuation balances and directly held shares, at 1.1 and 0.3 percentage points.

ABS head of finance and wealth Katherine Keenan said the 6.7% quarterly growth in residential property prices were the driving force behind the gains in household wealth.

"The strong property price growth reflected record low interest rates, rising consumer confidence and demand being greater than the levels of housing stock on the market," Ms Keenan said.

Photo by Marvin Esteve on Unsplash