It is not banks turbo-charged by property lending that are the key risk to the economy from any fall in house prices or rising interest rates, rather it is what might happen to consumer spending that worries the Reserve Bank of Australia.
RBA Governor Phillip Lowe used a speech on Thursday to warn that the nation's plunge into record levels of debt and the associated property boom had created a new breed of risk.
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"The recent increase in household debt relative to our incomes has made the economy less resilient to future shocks," he told a Brisbane business lunch.
Dr Lowe said that it was now commonly accepted that house prices and debt levels mattered in the debate about financial stability.
"What people typically have in mind is that a severe correction in property prices when balance sheets are highly leveraged could make for instability in the banking system, damaging the economy," he said.
But Dr Lowe said this was not in fact the focus of the RBA as it considered risks to the economy from housing debt, if the property market turned south.
Australian banks, he said, were "resilient and soundly capitalised" meaning they would suffer a drop in profitability but would not collapse.
"Instead, the issue we have focused on is the possibility of future sharp cuts in household spending because of stretched balance sheets," he said.
![Reserve Bank of Australia governor Philip Lowe has warned of rising house prices.](/web/20170504232845im_/http://www.theage.com.au/content/dam/images/g/v/w/s/x/n/image.related.articleLeadwide.620x349.gvygsz.png/1493937040577.jpg)
"Given the high levels of debt and housing prices, relative to incomes, it is likely that some households respond to a future shock to income or housing prices by deciding that they have borrowed too much.
"This could prompt a sharp contraction in their spending, as they try to get their balance sheets back into better shape. An otherwise manageable downturn could be turned into something more serious. So the financial stability question is: to what extent does the higher level of household debt make us less resilient to future shocks?"
Dr Lowe said that was a difficult question to answer, given house prices and accompanying debt were both at record levels.
He noted that households appeared less likely than in the past to use the equity in their homes to plough more money into housing.
"Households are much less inclined to do this. Many of us feel that we have enough debt and don't want to increase consumption using borrowed money.
"Many also worry about the impact of higher housing prices on the future cost of housing for their children.
"This change in attitude is also affecting how spending responds to lower interest rates. With less appetite to incur more debt for current consumption, this part of the monetary transmission mechanism looks to be weaker than it once was.
"There is, however, likely to be an asymmetry here. When the interest rate cycle turns and rates begin to rise, the higher debt levels are likely to make spending more responsive to interest rates than was the case in the past. This is something that we will need to take into account."
Dr Lowe also predicted that the heat could come out of the property market as supply of houses gradually matched demand, transport links opened up new areas for development and, eventually, as interest rates increased.
On Wednesday, Investment bank Citi released research predicting a 7 per cent fall in house prices over the next 18 months.
In response to Dr Lowe's speech the bank's analysts said it was "concerning" to see the RBA's data that households tend to have "very large" saving buffers or "very marginal buffers".
The proportion of households with less than one month's savings made up more than 30 per cent of loans.
Commonwealth Bank economists tipped Dr Lowe was sending a message to the federal government when in the question-and-answer section of his talk he said: "you don't fix [housing] affordability by boosting demand".Â
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