The RBA on Wednesday (10 November) released a report on household liquid assets (cash, deposits and equities) that indicates that although debt may have expanded across the board, the liquidity has risen strongly relative to income over the same period.
“The increase in liquidity over recent decades has been broad based across households, though strongest among those with mortgage debt,” the report said.
“When debt is measured after deducting liquid assets, the trend rise in the household debt-to-income ratio in Australia has been much less significant and, in fact, has been falling since the global financial crisis.
“In other words, households have larger liquidity buffers today than in the past, which can help to service the higher debt.”
The report noted the rise in household liquidity is closely connected to developments in the housing market through several channels. For example, higher housing prices have encouraged potential home buyers to accumulate more liquid assets in the process of saving for a deposit. Higher mortgage debt has also increased the repayment risks associated with future income declines and led indebted home owners to build liquidity buffers for precautionary reasons.
“The close link between the rise in household liquidity and debt is well demonstrated by the trend increase in the household saving rate over recent decades, which is mostly accounted for by households devoting a growing share of income to repaying mortgage debt,” the report stated.
“Our findings demonstrate that the decades-long expansion of household balance sheets does not necessarily mean that households have become overextended. A little recognised ‘side effect’ of rising housing prices and debt has been the increased rate of housing-related saving through higher mortgage principal payments.”
From a policy perspective the RBA said its findings have important implications from both a macro-economic and financial stability perspective.
“First, the decline in liquidity constraints implies that households may be less sensitive to temporary income and wealth shocks now than in the past. Second, the decline in liquidity constraints, particularly among indebted households, appears to have reduced the repayment risk associated with aggregate mortgage debt over the past couple of decades,” the RBA said.
