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Home Debt Could Be Economy's Downfall

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Home debt could be economy's downfall

David Uren, Economics correspondent

(Taken from: News.com.au - 29 May 2006)

EXCESSIVE home borrowing could bring the long run of prosperity to a messy end.

Reserve Bank deputy governor Glenn Stevens said the Australian and world economies had enjoyed 15 years of unusually smooth economic growth and low inflation.

But he told a Melbourne conference at the weekend there was a danger people would use that success as a reason to act and borrow recklessly.

Mr Stevens said households felt justified in taking on much higher levels of debt than in the past because of consistent growth and low interest rates.

But the level of household borrowing was now so much greater than ever before that policymakers such as the Reserve Bank did not know how households would react to an economic downturn.

"Nor, for lenders, could historical rates of default on mortgages be assumed to be a good guide to the future."

Mr Stevens said the world had been through long periods of sustained growth with low inflation and interest rates before, such as during the 1950s and 60s, and it was possible this experience would be repeated.

But he warned that now was not the time for standards of risk and credit management to become lax.

"Experienced hands almost invariably have an uneasy feeling about developments," he said.

"In part, that unease reflects a conviction that the business cycle and the cycle of greed and fear in the markets have not gone away."

He said the worry reflected changes in behaviour such as excessive home borrowing that could increase risks or create new ones.

At some point, the ability of the financial system to withstand shocks would be tested.

"But exactly when the bell might ring to signify a new phase of the game, and what might be the catalyst, we cannot say."

He said that as well as home borrowing, leveraged buyouts by companies and the credit derivatives market could also bring the sustained period of economic growth to a halt.

Mr Stevens, who is widely expected to succeed Reserve Bank governor Ian Macfarlane in September, said the bank had been well run under Mr Macfarlane and his predecessor, Bernie Fraser.

"The main thing to ensure is that the continuity of the overall system is maintained, and I'm sure it will be, whatever choices are made later in the year."

Buy, buy, buy ... oops ... sell, sell,sell!!! :blink:

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  • 301 Brexit, House prices and Summer 2020

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