Latest NewsMortgage : Look before You LeapFriday, 03 February 2017

Although times aren't tough now, further increases in debt like huge mortgages, will make households extremely vulnerable to future bumps in the economic road.

Reserve Bank governor Glenn Stevens is urging Australians to reduce household debt and increase savings, while the economy remains strong and the risk of financial hardships are low.

In a speech given in Sydney, Mr Stevens said the European sovereign debt crisis carried a lesson for Australians that "potential vulnerabilities need to be addressed in good times, even when markets are not signalling unease".

"One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks - such as a fall in income - to a greater extent than would be prudent."

Australia, saw its household debt surge past $1 trillion dollars last year, as rising house prices lured borrowers into larger loans. Home prices have jumped 20 per cent in the year to March, according to the Australian Bureau of Statistics, while the average size of a homeloan has ballooned to $287,000 in April. The average first time home buyer's loan stands at $290,000.

"Markets can happily tolerate something for an extended period without much reaction, then suddenly react very strongly as some trigger brings the issue into clearer focus," he said.

Overall, Australia still enjoyed low arrears rates on mortgages and the ability for households to service their debts well, Mr Stevens said in the speech to Western Sydney Business Connection. That in turn led to strong asset quality in Australia.

"So, to be clear, my message is not that this has been a terrible thing."

"But that doesn't mean it would be wise for that build-up in household leverage to continue unabated over the years ahead."

Mr Stevens said Australians may already be adjusting their spending and raising savings. Retails sales increased moderately in the first quarter, while April home loan data show a seventh consecutive monthly fall, underscoring an aversion to taking on more debt.

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