LAUSR

Recent rises in the ratio of Australian housing prices and household debt have become an issue of public debate. This paper outlines the Reserve Bank of Australia’s investigation into this issue. Three areas are examined: aggregate trends in housing prices, debt and household incomes; the distribution of household debt and their effect on the economy as a whole. It is found that part of the cause of the rising ratio of house prices to household debt has been a recent slowdown in household income, strong demand from overseas buyers and strong population growth. While borrowing has added to the upward pressure on prices the underlying cause is embedded in the supply–demand dynamics. It is concluded that the recent increase in household debt relative to incomes has made the economy less resilient to future shocks.