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A new research paper from the Reserve Bank of Australia (RBA) has noted that as household wealth has expanded in recent decades, so have household liquid assets.
The rise in liquidity buffers (cash, deposits and equities) has been broad across households, but the Reserve Bank found the strongest growth among those with mortgage debt.
“Overall, the rise in household liquidity appears to have increased the financial resilience of the household sector,” the report stated.
According to the paper, the growth in cash buffers is “closely connected” to developments in the housing market, with higher prices encouraging aspiring buyers to accumulate more liquid assets while saving their deposit.
Further, borrowers have been incentivised by the threat of future income shocks that have increased mortgage repayment risks, to build precautionary liquidity buffers.
Offset accounts were found to be primary driver of raised cash buffers among households with mortgage debt, at least since the 2010s – with the RBA noting those with an offset account have larger buffers on average and also experienced a greater rise in buffer over time.
“A little recognised ‘side effect’ of rising housing prices and debt has been the increased rate of housing-related saving through higher mortgage principal payments,” the paper stated.
“This increase in housing-related saving has been supported by the decline in interest rates and has allowed indebted households to build larger liquidity buffers.
“To the extent that more liquidity is associated with less financial stress, our results suggest that the higher ratio of debt to income has not made the household sector more financially fragile.”
Further, the RBA noted that mortgage offset and redraw accounts are “unusual” by international standards and that they make housing more liquid, allowing borrowers to better absorb unexpected income and wealth shocks.
Mortgages with offset accounts currently comprise around 40 per cent of home loans in Australia, while mortgages with redraw facilities make up around 70 per cent.
“It would be interesting to investigate the macroeconomic and financial stability implications of such mortgage accounts,” the paper said.
“For example, these accounts may make aggregate consumption less volatile in Australia than other comparable countries. They may have also reduced liquidity constraints by more in Australia than elsewhere, with a potential bearing on financial stability risks stemming from the household sector.”
Australia’s ageing population could also explain a greater proportion of households holding more cash – with older people tending to hold more of their portfolios in liquid assets.
Between 2003/04 to 2017/18, the aggregate liquidity buffer rose by about two and a half months of disposable income.
The RBA analysis found the population aged 65 and above had accounted for about one month of the aggregate increase.
[Related: Affordability challenge ‘the most significant on record’: REIA]
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