The RBA has sounded a warning on Australia’s high levels of household debt in the wake of the post-COVID surge in house prices.

In a speech yesterday, assistant governor Michele Bullock said the central bank is “continually assessing” possible regulatory measures to address financial stability risks.

For the 12 months to July 31, housing markets in Australia’s capital cities generated a combined total return of 19.9%.

That’s red-hot.

And the turnaround began just a few months after a number of historic measures were introduced.

Interest rates got slashed to zero while banks offered deferrals on home loan repayments. Bullock called those measures a “bridge” to shield households from the worst of the pandemic.

Fast forward 18 months, and the RBA is now assessing the “surprising and dramatic” turnaround in Australian house prices, she said.

That assessment is taking place just prior to the release of the RBA’s next Financial Stability Review, which comes out in October.

Lending standards

House prices are partly a function of credit growth and Bullock noted that with rates locked in at rock-bottom, credit growth has been rising.

Currently, annualised credit growth is climbing around 7% per year and is expected to top out at 11% early next year, Bullock said.

At those levels, household credit growth will hit its highest level in more than a decade.

While the RBA has flagged the attributes of rising house prices for Australia’s economy due to an increased wealth effect, strong credit growth means Australia’s household debt levels — already among the highest globally — are also climbing.

RBA data shows the number of new mortgages with loan-to-value ratios above 90% ticked higher last year, but has come back below 10%.

However, the share of new mortgages where the applicant has a debt-to-income ratio equal to or more than 6-to-1 has climbed from around 15% to more than 20%.

Currently, “the evidence suggests that lending standards overall have been maintained in the face of very strong demand for housing”, Bullock said.


A feature of the post-COVID boom is that it hasn’t been investor-led; rather, new home buyers have taken advantage of the lift in household savings rates and rock-bottom interest rates to access the housing market.

That differs from the last time APRA got involved in Australia’s housing market, when it enacted macro-prudential measures to curb the flow of new lending to housing investors (in 2014 and 2017).

And as household debt levels rise, Bullock said it does have the capacity to amplify economic shocks if consumers are already saddled with burdensome mortgages.

Bank regulator APRA and the RBA “are monitoring these trends closely”, Bullock said.

Back in June, the economics team at UBS bank said the conditions for macro-pru restrictions should be in play by October, based on annualised rates of credit growth.

If macro-prudential measures do come back in play, Bullock said they won’t take the form of previous measures which were aimed at housing investors.

Instead, tools that “address serviceability of loans and the amount of credit that can be obtained by individual borrowers are more likely to be relevant”, she said.

In summary, Bullock said Australia’s banks remain well-capitalised and there are no signs that lending standards have deteriorated materially.

But, “whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing”, she said.