Thursday, 17 June 2010

Low interest rates lead to debt: RBA

Low interest rates lead to debt: RBA

June 15, 2010 - 1:34PM

Financial deregulation and structural declines in the cash rate have led to increased household indebtedness, the Reserve Bank of Australia (RBA) says.

But while evidence suggests increased levels of debt have not left Australian households over-exposed, pockets of stress remain, RBA deputy governor Ric Battellino said on Tuesday.

"All countries have experienced rises in household debt ratios over recent decades," Mr Battellino said in a speech in Sydney.

"Clearly, therefore, the forces that drove the rise in household debt ratios were not unique to Australia.

"The two biggest contributing factors were financial deregulation and the structural decline in interest rates."

Between 1985 and 1995, the average cash rate in Australia was 11.4 per cent, compared with the average 5.3 per cent between 2000 and 2010.

The current cash rate is 4.5 per cent following six rate hikes since October last year that took the rate off a 49-year low of three per cent.

However, Mr Battellino said first home buyers will bear close watching in the future while pockets of stress have emerged in Western Sydney following a sharp run up in house prices between 2002 and 2003.

"More recently there are some signs of increased housing stress in south-east Queensland and Western Australia, again following sharp rises in house prices in these areas," he said.

Mr Battellino said despite increased levels of debt, evidence suggests Australian households are servicing it well.

Most household debt is being raised to buy assets, while debt is being taken on by households in the strongest position to service it.

He noted financial assets held by households have grown to the equivalent of 2.75 years of household income, up from 1.75 years income in the early 1990s.

"If we look at the distribution of debt by income, we can see that the big increase in household debt over the past decade have been at the high end of the income distribution.

"Households in the top two income quintiles account for 75 per cent of all outstanding household debt.

"In contrast, households in the bottom two income quintiles account for only 10 per cent of household debt."

Mr Battellino was speaking to the Financial Executives International of Australia at the law firm Clayton Utz.

The event was closed to the media and an embargoed copy of the speech was provided.

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