As some will know, I think the RBA's Dr Luci Ellis is good value. And I am sure I have unnecessarily embarrassed her by plugging the Assistant Governor’s gig. So apologies again, Luci. But she is a worthy subject because of her ability to offer up non-obvious insights. She made an especially valuable comment on household debt in her recent speech, which I have already reviewed here.
Now while I don’t doubt others have made similar observations, this is not something I have publicly read before. In short, Ellis argues that the increase in Australian household debt during the 1990s should have been expected given the heavy regulatory constraints that were placed on borrowing prior to the embrace of financial market deregulation during the 1980s.
A complementary explanation is, of course, the once-off, and apparently permanent, downward shift in the nominal cost of debt (ie, interest rates) that was enabled by the emergence of independent central banks and the ‘inflation targeting’ regime in the 1980s and mid 1990s, in the case of Australia (recall the 17 per cent mortgage rates at the beginning of the last decade--if you don't, your parents will). Anyway, it is worthwhile absorbing Luci’s words:
“As we noted in the most recent Financial Stability Review released in March, Australian housing debt is higher relative to housing assets now than in the past (Graph 4). We should expect this ratio to be higher than in the 1970s and 1980s. The financial regulation of that period artificially restricted household borrowing. For example, unmarried women found it hard get mortgages back then. The question is whether this measure of leverage is higher than can be sustained. After all, it is much lower than in the United States, even before their boom-bust cycle.”
