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RBA flags ‘overhang effect’ of rising mortgage debt

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Charbel Kadib 6 minute read

New research from the Reserve Bank has highlighted the link between mortgage debt and household spending amid debate over home loan serviceability assessment guidelines.

The Reserve Bank of Australia (RBA) has published new research from its economic research department, which has identified evidence of a link between “high levels of owner-occupier mortgage debt” and a fall in household spending, referred to as the “overhang effect”.

According to The Effect of Mortgage Debt on Consumer Spending report, if mortgage levels remained at “2006 levels”, annual aggregate consumption would have been approximately 0.2 to 0.4 per cent higher.

The RBA added that the negative effect of debt on spending is “pervasive" across households with owner-occupied home loans. 


“Our results also suggest that an increase in aggregate owner-occupier mortgage debt can have important implications for aggregate spending, all else constant, and go at least part of the way to resolving the post-crisis ‘puzzle’ of unusually weak household spending in Australia,” the RBA report stated.

The central bank’s research comes amid continue debate over home loan serviceability assessment standards, with the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission (ASIC) moving to reform current practices.

ASIC’s proposed update of its responsible lending guidance (RG 209) has been met with a renewed call from stakeholders for a revision to the way a borrower’s spending habits are assessed.

The RBA’s research has supported claims from some stakeholders, including Westpac, who have noted that changes in a borrower’s spending behaviour after they assume mortgage debt should be reflected in regulatory guidance.

In its submission to ASIC during the regulator’s first round of consultation, Westpac called for greater flexibility in the assessment of a borrower’s living expenses.


“Adopting a modest lifestyle for a period of time in order to acquire real property has been the means by which many Australians have secured long-term financial security,” Westpac stated.

“Experience shows that many customers are prepared to, and do actually, make lifestyle adjustments after acquiring a home and can then service their home loan obligations without substantial hardship.

“As such, Westpac submits that placing too much emphasis on the customer’s pre-application living expenses when determining suitability, without allowing scope for reasonable lifestyles adjustments (‘belt-tightening’), would have the effect of denying credit to many customers.”

Impact on economy still ‘unclear’

Despite confirming the direct impact of higher mortgage debt on household spending, the RBA has maintained that the impact of the “debt overhang” on the overall economy remains “unclear’, noting the positive stimulatory contribution of the credit boom.  

“[These] estimates abstract from other stimulatory effects of debt,” the report noted.

“The increase in mortgage debt has likely lifted house prices and, by this, also supported consumption over this period.

“Our estimates are thus best interpreted as the loss in consumption had all other trends, such as the growth in house prices, occurred even though debt remained constant.”

The RBA concluded: “As a result, the net effect of the increase in debt since the mid-2000s is unclear.”

[Related: ASIC urged to ‘codify’ broker obligations]

RBA flags ‘overhang effect’ of rising mortgage debt
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Charbel Kadib

Charbel Kadib

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

Email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.


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