Australian homeowners cut back on spending when their mortgage debts are higher, with new research challenging previously-held economic wisdom.
A Reserve Bank of Australia research paper released on Thursday used household spending data to show how higher debts prompt spending drops.
"We find evidence consistent with a 'debt overhang effect' - households cut back on their spending when they have higher levels of outstanding mortgage debt," the report said.
The report comes as Treasurer Josh Frydenberg continued to push the big banks to pass on the full benefit of two recent interest rate cuts to get more money back into the economy.
The RBA research found a 10 per cent increase in debt reduces household expenditure by 0.3 per cent, even when net wealth has stayed the same.
"This suggests that changes in the composition of household balance sheets affect spending, which runs counter to macroeconomic models that combine assets and liabilities into a single measure of net wealth," the report said.
The report said an increase in owner-occupier debt had important implications for spending across the economy, and partly explains the "puzzle" of unusually weak household spending since the 2008-2009 global financial crisis.
The Australian Bureau of Statistics also released data on Thursday showing the value of new lending to households fell 1.3 per cent in May, after a 0.6 per cent rise in April.
"Most components of new lending to households fell in May, led by weaker lending for owner-occupier dwellings (down 2.7 per cent) and for investment dwellings (down 1.7 per cent)," ABS chief economist Bruce Hockman said.
Personal finance fell 0.7 per cent in May in seasonally-adjusted terms, following a 4.2 per cent rise in April, and is down 16.2 per cent year-on-year.
CommSec Research found other signs the economy was struggling, with the value of loans for home renovations falling 1.2 per cent to a record-low $270 million in May.
It also found the average loan for an established dwelling has fallen, as homeowners choose to reduce their debts rather than spend.
ANZ Research said housing finance commitments fell 2.4 per cent from April to May, culminating to the lowest year-on-year result in a decade, down 20.9 per cent on the same point in 2018.
But ANZ also predicted buyer sentiment would improve after the federal election and a string of public holidays in April.
Australian Associated Press
