Date: 08/12/2015 20:10
By James Glynn
SYDNEY–Household balance sheets in Australia are riskier than they used to be, something that is likely to weigh on an economic recovery in the country, the Reserve Bank of Australia said Wednesday.
“I think it is difficult to escape the conclusion that household balance sheets are, on average, a little more risky that they once were,” Philip Lowe, the RBA’s deputy governor, told an audience in Perth.
And pinning hopes of stronger economic growth on household spending might carry an element of danger, he added.
“Given the position of household balance sheets, it is unlikely to be in our long-term interest for a consumption boom to be financed by a pickup in household borrowing,” Mr. Lowe added.
In previous property booms, consumers were able to borrow against rising house values to fund spending, but conditions have become more stretched as house prices soar, borrowings increase, and wage growth sinks to record lows, he said.
“With slower expected future income growth and increased concerns about future housing costs, the response to higher housing prices looks to be smaller than it was previously,” Mr. Lowe said.
“This smaller response is affecting overall spending in the economy,” he added.
The comments suggest the RBA, while leaving the door open to further interest rates, sees limited benefits in doing so.
Soaring land prices are a factor behind the jump in household debt, Mr. Lowe said, citing a 40% increase in population since 1989 and constrained land supply as key factors.
Increased infrastructure spending might be an answer, he added.
“Increased investment in infrastructure, including in transport, probably also has a role to play here. Done properly, it could help lift the return to other forms of investment in a wide range of industries across the economy,” Mr. Lowe said.
The comments come amid forecasts for weak growth for Australia in the coming years as falling commodity prices hurt profits, government revenues and confidence.
Warnings that an asset-price bubble is inflating in Sydney have grown in recent months, prompting the banking regulator to move to quash surging investor demand.
With interest rates already at record lows and the government struggling to rein in a yawning budget deficit, economists have warned that the amount of scope to lift growth through the usual policy channels is limited.
Ratings agency Standard and Poor’s recently ramped up warnings about a decline in the government’s budget position, saying risks to the Australia’s AAA-rating will grow if deficit reduction isn’t ongoing.
Low interest rates aren’t an answer to Australia’s growth predicament, Mr. Lowe added.
“Monetary policy is, ultimately, not a driver of medium-term economic growth,” Mr. Lowe said.
“While low interest rates are currently helping the economy through a period of transition, an extended period of low interest rates implies ongoing low returns to savers and low underlying returns on assets,” he said.
“This is not a world to which we should aspire,” he added.
RBA Governor Glenn Stevens warned recently that cutting interest rates further might stoke instability in the country’s banking system, something that would have broad consequences for the economy.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
August 12, 2015 06:10 ET (10:10 GMT)
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