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Treasury warning on loan defaults if unemployment rises

“The bottom line is that households will likely continue to service debt unless unemployment prevents them from doing so.”

The brief said increased bank capital since the global financial crisis had improved the resilience of the financial system.

“In addition, not withstanding the range of issues that have been raised about banks’ lending standards by the royal commission, at a high level it appears that prudential policies such as minimum serviceability buffers introduced in late 2014 have been restricting lending to marginal borrowers,” the brief said.

“While these policies represent some risks in transition, it should also increase the resilience of bank balance sheets and the financial system in the long run.”

The RBA has been concerned about the impact of high household debt on consumption, which is a key economic driver.

“The high level of household debt remains a key consideration for household consumption. Household debt levels relative to income have continued to edge higher,” the RBA’s latest monetary policy statement says.

“A highly indebted household facing weaker-than-expected growth in income or wealth is more likely to respond by lowering consumption. Consumption growth may also be weaker for a time if households become concerned about their debt levels and choose to pay down debt more quickly.”

The brief noted that households in the top two income quintiles held about 68 per cent of Australian household debt.

“Higher-income households are more likely to comprise highly skilled workers that are less vulnerable to unemployment, which would enhance debt sustainability.

“Falling interest rates have allowed households to get ahead of their scheduled mortgage payments.”

ANZ economists wrote in a note on Friday that household spending has been reasonably resilient despite the downturn in house prices. “If the labour market remains solid then we can get a stabilisation in the saving rate without there needing to be much of a decline in spending,” they said.

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