Australian mortgages put heavy weight on spending: search for a central bank

SYDNEY (Reuters) – The Australian mountain of mortgage debt weighs even more heavily on consumer spending than previously thought, according to a paper released by the central bank, suggesting that recent rate cuts may not be enough alone to revive the activity.

Research by the Reserve Bank of Australia (RBA) is worrisome, as the ratio of household debt to disposable income in the country has reached a record high of 190%, easily among the highest in the developed world.

This is mainly housing loans and the newspaper found that it was this type of debt that had the biggest impact on spending, even considering the increase in income and housing prices.

"Higher mortgage debt is badociated with reduced spending even when we control changes in net real estate and cash flow," the research paper concludes.

"Overall, the negative effect of debt on spending is ubiquitous in households with owner-owned mortgage debt."

This could be one of the reasons why household spending has been unusually low in Australia since the global financial crisis, a weakness that drove economic growth to the bottom of the decade earlier this year.

Regular research reports from RBA staff do not necessarily express the views of the policy development board, but are often the subject of discussion at its monthly meetings.

THE LARGEST DRAG ON GROWTH

Households are key to Australia's $ 1.9 trillion (US $ 1.3 trillion) economy, accounting for about 56 percent of annual gross domestic product. Weak wage increases, fears for job security and high levels of debt have made private consumption the main drag on overall growth in the past year.

This has prompted the RBA to cut interest rates twice since June, to a record 1%. Financial Futures <0#YIB:> see a real chance of a third move before Christmas that would bring the key rate at an unprecedented rate of 0.75%.

RBA Governor Philip Lowe also made the unusual decision to openly call for more fiscal stimulus and infrastructure spending to support growth, noting that the effect of falling interest rates has faded. the weather.

The paper suggests that one of the reasons for the decrease in the impact is an "over-indebtedness effect," in which households reduce their spending when they have larger mortgage debts.

"We find that the overbill effect is ubiquitous in owner-occupied households and is not exclusively driven by households that are in financial difficulty or have strong incentives to save as a precaution," he said. -he declares.

The study estimated that a 10% increase in debt reduced household spending by 0.3%. This is true even when any increase in debt accompanies an increase in the value of their badets, which is at odds with conventional economic theory.

It has also made households more sensitive to economic uncertainty.

"We find evidence that indebted households reduce their spending more than other households during adverse macroeconomic shocks, such as the global financial crisis, but the negative effect of debt is also ubiquitous at other times." . "