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RBA: Sluggish income growth intensifies mortgage risks

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Income growth has been stagnant, resulting into heightened mortgage risks

The Reserve Bank of Australia (RBA) said households are becoming more vulnerable to mortgage risks due to the slow income growth.

In his opening address at the CFO Forum, RBA deputy governor Guy Debelle said debt remains high relative to income due to the "unexpectedly low" wage growth in Australia.

He explained that in the past decades, mortgage pressures were offset by higher inflation accompanied by higher income growth.

"Because the mortgage is fixed in nominal terms, the debt level declined quite rapidly relative to a household's income when incomes were growing quickly," Debelle said.

Over the past years, however, income growth remained subdued forcing households to carry a larger mortgage for longer than they expected when they took out the loan.

"While they can service the mortgage, it has consumed a larger share of their income for longer than they might have intended," Debelle said.

Just recently, the Australian Prudential Regulation Authority (APRA) has ordered banks and other lenders to assess the borrowers' income. This came following the findings of the royal commission about the malpractices of big banks.

With this, the deputy governor believes there is also a risk of a further tightening in lending standards in the period ahead.

"This may have its largest effect on the amount of funds an individual household can borrow, more than the effect on the number of households that are eligible for a loan. This, in turn, means that credit growth may be slower than otherwise for a time," Debelle said, adding that the stricter regulations will have a greater impact on home prices than on consumption.

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