IMF warns Australia on household debt vulnerability

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Australia's high levels of household debt leave it potentially exposed to a global economic shock or a banking crisis, the International Monetary Fund (IMF) warned on Wednesday.

According to the October Global Financial Stability Report, Australian household debt has risen to 100 percent of GDP, well ahead of other advanced economies where the ratio is much lower at 63 percent.

"Higher growth in household debt is associated with a greater probability of banking crises," according to IMF's latest Global Financial Stability Report.

VCG Photo

With Australia teetering on the edge when it comes to leverage, the IMF fear a shock to the economy could leave the country "extremely exposed."

"New empirical studies, as well as recent experience from the global financial crisis, have shown that increases in private sector credit, including household debt, may raise the likelihood of a financial crisis and could lead to lower growth," the report said.

With interest rates already at a record low of 1.5 percent, any increase could add to the growing debt problem.

The IMF warns the global level of household debt "remains high by historical standards" and "has kept growing in other advanced economies such as Australia and Canada."

Australia's high levels of household debt leave it potentially exposed to a global economic shock or a banking crisis. /VCG Photo

While the report noted that debt can be positive in the long term, it cited research showing that high household indebtedness can cause "a significant debt overhang when a country faces extreme negative shocks."

The Reserve Bank of Australia has repeatedly warned that rising levels of household debt and slowing wage growth mean some consumers could struggle to meet mortgage repayments when interest rates start rising.

"Growth in housing debt has been outpacing the slow growth in household incomes for some time," RBA governor Dr Philip Lowe pointed out.

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