If Australia has an Achilles’ heel it’s the high level of household debt that has accompanied surging home prices over the last 30 years. Of course, in the absence of a major trigger for debt servicing problems – either from a surge in unemployment or a surge in interest rates – it hasn’t so far caused a major problem for the economy. Fears that the pandemic would deliver a trigger in the form of higher unemployment were quickly headed off by JobKeeper and record low interest rates. But a potential trigger is now upon us again with rising interest rates.

At one extreme some see rising interest rates and high household debt as setting the scene for a perfect storm of a surge in mortgage stress, forced selling and a crash in property prices causing a big hit to the economy. At the other extreme some point out that the household sector is actually in good shape given a surge in wealth including a big rise in bank deposits so there is no need for concern. The truth is probably
in between these two extremes. And much depends on how high interest rates go. This note looks at the main issues…