The governor of the Reserve Bank says it is difficult to ignore the risk of rising household indebtedness in Australia, warning record-high household debt levels have started to affect spending.

Dr Phil Lowe has said further increases in indebtedness could make household balance sheets more fragile, and if households soon decide they have borrowed too much, they may cut back consumption “sharply”, hurting the economy and employment.

“It is difficult to quantify this risk, but it is one that is difficult to ignore,” he said.

Speaking at the Australia-Canada Economic Leadership Forum in Sydney on Wednesday, Lowe said the outlook for Australia’s economy seemed relatively positive, with growth expected to pick up to 3% over the next two years, inflation tipped to rise above 2%, and the unemployment rate likely to remain steady.

Australia’s historically low wages growth may also have bottomed, he said, though a pick-up in wages growth did not seem imminent.

But Lowe said the ratio of household debt to income was at a record high – at 189.6% – and there were signs it was starting to affect spending.

“Households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades,” he said.

“For many, this is a sobering combination. Reflecting this, our latest forecasts were prepared on the basis that growth in consumption was unlikely to run ahead of growth in household income over the next couple of years.

“This interaction between consumption, saving and borrowing for housing is a significant issue.

“We are still learning how households respond to higher debt levels and lower nominal income growth,” he said.

Lowe also defended the rules-based open international trading system, saying Australia had benefited greatly from it.

“Too often these days, a commitment to open international trade, integration into global capital markets, a strong role for markets and a dynamic financial sector are seen as liabilities, not as assets,” he said.

But he acknowledged that the benefits from the international trading system could fall unevenly across the community.

“We recognise that while openness makes the size of the pie bigger, it can also affect the distribution of the pie in a way that our societies feel uncomfortable with,” he said.

“This is something that we have both tried to address and have had more success on this front than some other countries.”

He also weighed into the house price debate, saying part of the reason house prices were so high in some capital cities was poor planning.

He said Canada and Australia were both experiencing challenges on the supply-side, at a time of strong demand from both residents and non-residents.

“In some parts of Australia, there has also been underinvestment in transport infrastructure, which has limited the supply of well-located land at a time when demand for such land has been growing quickly,” he said.

“The result is higher prices.”