Households have too much debt and the RBA might have to cut interest rates up to three times to ward off a dramatic de-leveraging event in the economy.
Credit Suisse strategist Damien Boey argues the output gap in the economy is widening at a time when households are past the “break-even” level of leverage.
In fact, at a gearing ratio of 27 per cent, they are well beyond the 18 per cent level at which residential housing investment starts being loss-making, he estimates.
To bring households back into sustainable territory, the RBA either has to force Australians to shed debt, which would pose a shock to the economy, or raise the level at which households break even by lowering the cost of debt.
Mr Boey arg…
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