RBA flags risks of skyrocketing debt

By Gerv Tacadena

RBA said a global economic shock can impact mortgage holders in Australia.

Australia's debt level has risen to a point where any global economic shock could make matters worse.

In an address delivered early this week, Reserve Bank of Australia assistant governor Michelle Bullock said the country's banking system is quite vulnerable to an economic shock resulting from global factors as credit quality of outstanding mortgages continue to deteriorate.

According to recent figures, Australia's debt-to-income ratio ballooned to 190% in 2013, as home buyers and investors jump on the opportunity to cash in on the housing market boom over the recent years.

"Australians borrow not only to finance their own homes but also to invest in housing as an asset, this is different to many other countries where a significant proportion of the rental stock is owned by corporations or cooperatives," Bullock said, as quoted by The Sydney Morning Herald.

While arrears rates on mortgage loans remained at low levels, Bullock said households would struggle to meet repayments if a sudden economic shock were to happen.

"If they have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans," she said.

"This could have adverse effects on the real economy in the form of lower economic growth, higher unemployment and falling house prices, which could, in turn, amplify the negative shock."

For Bullock, the recent out-of-cycle hikes by banks will put further pressure on households, but stricter lending standards will likely keep the balance and prevent a widespread credit crunch.

"While the changes to lending standards have tended to reduce maximum loan sizes, this has primarily affected the riskiest borrowers who seek to borrow very close to the maximum loan size and this is a very small group. Most borrowers will still be able to take out the same-sized loan," she said.

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