Reserve Bank of Australia governor Philip Lowe is worried about what will happen to highly leveraged Australian households when rates return to what he has called “normal” levels. That should be sufficient warning that the rates we have now are not normal and borrowers should not be factoring in that they will continue. The RBA governor shared his concerns around sluggish wage growth and record levels of household debt. He said the recovery in the global economy is a sign that economic growth in the advanced economies has become self-sustaining, rather than just being dependent on monetary stimulus. He pointed out that it would also lift the return to many savers who have been receiving very low returns on interest-bearing assets for a decade now. Investment strategies that looked sensible when interest rates were very low tend not to look so good when interest rates are higher. Property investment and imbalances in the mortgage market have been on the RBA’s radar since 2014. The central bank’s fears triggered APRA’s macro-prudential measures that continue to impact residential lending today. The burning question is how we deal with a higher level of household debt and higher housing prices, especially in a world of more normal interest rates. Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to according to Mr Lowe. His comments follows those made this week by RBA assistant governor Luci Ellis, who warned that even the best lending standards might not be enough to protect borrowers and lenders from an economic shock. Following on from that ……CoreLogic’s latest Property Pulse Report has analysed the state of household debt nationwide. The results show higher income households are more likely to be over-indebted than lower income households. The report considers a household to be indebted if their current debt is either at least three times their income or 75 per cent and over of the value of their assets. On those measures 21.6 per cent of households are over-indebted and almost 52 per cent of households not over-indebted. 26.4 per cent of households have no debt. Lower income households are more likely to be debt-free compared to higher income households, which is reflective of many lower income households having paid off their debt.