Australia's Household Debt Burden Continues to Build

Australians continue to raise what is already a record level of household debt at a pace more than twice that of their income growth.

It is an imbalance in the economy that continues to alarm onlookers such as global ratings agencies and the Organization for Economic Cooperation and Development. The latter puts Australia's household debt at more than 200% of incomes.

The debt surge continues to unnerve the Reserve Bank of Australia, which fears too much debt might eventually snuff out consumer spending, a key driver of economic growth.

Housing credit grew a further 0.5% in August from July, and 6.6% from a year earlier, according to data Friday from the Reserve Bank of Australia. That compares with wages growth of less than 2% on-year and incomes growth as weak as it has been since the last recession in the early 1990s.

Gareth Aird, economist at the Commonwealth Bank of Australia said housing credit growth is running at more than double the rate of growth in household income. As such, Australia's household debt-to-income ratio has once again edged up in August to another record high.

Despite regulatory moves to tighten the criteria around lending to property investors, the pipeline for housing credit remains relatively robust.

Janu Chan, economist at St. George Bank, said lending for investor housing credit continues to be a key driver of credit growth more broadly. Investors' credit grew 0.5% in August versus a 0.4% increase in July.

"The slowdown in credit for investor housing appears to have abated following the new regulatory measures enacted by APRA earlier in the year," she said. The high level of household debt could badly exacerbate the next economic downturn when it comes, she added.

In late March the Australian Prudential Regulation Authority announced added curbs for lending to property investors which had ballooned, rivaling lending for owner-occupier property. Those curbs have had some effect in slowing credit growth, making any signs of a flattening out or a recovery worrisome for policy makers.

The RBA continues to highlight the risks to the economy of the debt build-up. It has welcomed a stronger pace of job creation, saying it should improve wage growth over time. Still, the burden that consumers now find themselves under will take a long time to ease, if wages were to nudge up.

"Growth in wages and inflation had remained low but stable. This was expected to remain the case for some time," the RBA said in minutes of its Sept. 5 policy meeting.

The RBA meets Tuesday to once again debate the level of the benchmark interest rate. It has remain at a record-low 1.5% for over a year and is expected to remain unchanged in October.

The RBA remains unable to raise interest rates as inflation and wages growth are too weak. Cutting interest rates appears equally as unlikely as RBA Governor Philip Lowe does not want to further stoke the rise in household debt.

"We think the RBA will leave the cash rate on hold throughout most of 2018 with the hope that the debt to income ratio plateaus courtesy of a lift in income," said CBA's Aird.

-Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

September 29, 2017 03:17 ET (07:17 GMT)