CANBERRA, AAP – Australian households are among the most indebted in the world, but new research suggests this does not necessarily mean they are overextended.
A research paper by the Reserve Bank of Australia has found households have larger liquidity buffers today – such as cash, deposits and equities – than in the past, which enables them to service higher debt.
“The increase in liquidity over recent decades has been broad based across households, though strongest among those with mortgage debt,” the report says.
“Consistent with this, the share of liquidity-constrained households has declined significantly.”
It sees the rise in household liquidity as being closely connected to developments in the housing market.
Higher housing prices have encouraged potential home buyers to accumulate more liquid assets in the process of saving for a deposit, while higher mortgage debt has led indebted home owners to build precautionary buffers.
“This increase in housing-related saving has been supported by the decline in interest rates and has allowed indebted households to build larger liquidity buffers,” the report says.
“Our findings demonstrate that the decades-long expansion of household balance sheets does not necessarily mean that households have become overextended.”
The findings imply 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 past couple of decades.