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The Reserve Bank of Australia has warned it may be necessary to clamp down on household debt-to-income levels as growing debt driven by booming property prices could increase the risk of financial instability.
The central bank is finding it hard to judge in real time whether prices are out of line with market fundamentals, and said the macro-financial risks posed by growing household debt warranted close attention.
“Sharp rises in housing prices that are not associated with fundamentals could lead to instability by raising the risk of a subsequent decline,” RBA assistant governor Michelle Bullock said in an online speech on Wednesday.
In other words, if there were a bubble in house prices, it could pop.
“Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing,” she said, but gave little indication the RBA believed an intervention was needed at this stage.
The consequences of higher household debt could make the economy more susceptible to downturns if there were a shock to incomes or house prices, Ms Bullock said, but at the same time acknowledged the strong property market had been a key economic support through the COVID-19 crisis.
But while banks had strong balance sheets and lending standards were currently being maintained, “with the increase in housing prices and housing debt, risks to financial stability could be building”.
Ms Bullock said given the potential for growing risks, there was an open question about what authorities could do aside from sit and watch.
