Australian households are among the most indebted in the world, but new research suggests that this does not necessarily mean they are over-extended.
A study by the Reserve Bank of Australia has found that households have larger liquidity buffers today – such as cash, deposits and equities – than in the past, enabling them to service higher debt.
“The increase in liquidity in recent decades has been broad-based across households, though strongest among those with mortgage debt,” the report said.
“Accordingly, the share of liquidity-restricted households has fallen markedly.”
It sees that the increase in household liquidity is closely linked to developments in the housing market.
Higher home prices have encouraged potential home buyers to accumulate more liquid assets in the process of saving up for a deposit, while higher mortgage debt has prompted indebted homeowners to build cautionary buffers.
“This increase in housing-related savings has been supported by the fall in interest rates and has given indebted households the opportunity to build up larger liquidity buffers,” the report said.
“Our results show that the decades-long expansion of household balances does not necessarily mean that households have become over-stretched.”
The results suggest that households may be less sensitive to temporary income and wealth shocks now than in the past and a reduced repayment risk associated with mortgage debt over the last few decades.
Australian Associated Press