What's mitigating the risks of Australia's high household debt?

by Gerv Tacadena23 Feb 2021

Australia's high household debt level remains a financial and economic stability risk despite the country being one of the few that has a robust credit rating, according to Fitch Ratings. How is it managing this potential risk?

The country’s debt-to-income ratio, at 180%, is among the highest of Fitch’s AAA-rated nations. According to the ratings agency, this continues to be an economic and financial stability risk, particularly in the event of a sustained labour market or interest rate shock.

Still, recent factors are mitigating this risk. For instance, most mortgage holders have already finished their repayment holidays. The latest data from the Australian Banking Association showed that 91% of borrowers have already resumed repayments.

Anna Bligh, CEO of ABA, said while the year is going to be tough as banks starts to call loans in and as other economic stimulus packages end, borrowers are not "going to fall off a cliff".

"Their banks will be working with them. For some people, in some circumstances, they may get another small period of deferral. Others may be expected to pay something, but not everything," she said in an ABC radio interview. "Banks are now in a much stronger position should we see any second round or third round of economic downturn."

Another crucial factor that helps mitigate the financial and economic risks of high household debt level is the strategy of some borrowers when it comes to handling their mortgages.

"Households also further built-up mortgage offset and redraw accounts during 2020," Fitch Ratings said.

The low-interest rate environment also provides a huge boost, particularly in the capacity of borrowers to service their debts. However, Fitch Ratings said the cheap cost of debt could also potentially drive house prices and debt levels up.

Overall, Fitch Ratings said Australia's AAA rating reflects its "strong institutions and effective policy framework", which helped it weather the economic impacts of the COVID-19 pandemic.

"We forecast the economy to expand by 3.8% in 2021 and 2.7% in 2022, driven by robust consumption as households draw down high accumulated savings from government relief measures," Fitch Ratings said.