s income which must be devoted to debt servicing. the measure used in this speech is the ratio of interest payments by households to household disposable income. this is derived from information in the national accounts, with some adjustments. graph a1 the upper line in graph a1 ( the same as graph 3 in the text ) shows the resulting series. the notable feature of this series is that the peak value for debt servicing was in the period of high interest rates in the late 1980s. subsequently, debt servicing costs declined sharply as interest rates fell. the effects of interest rate changes in the 1990s are visible as cyclical rises and falls in debt servicing, around a slowly rising trend, caused by the increase in debt levels. two adjustments have been made to the data published in the national accounts to arrive at the interest paid data used here. first, unlike the published national accounts data, the figures here are not measured net of financial intermediation services indirectly measured ( ‘ fisim ’ ), which treats some interest as payment for the financial intermediation services supplied to households which are not explicitly paid for by fees. in assessing the actual interest payments made by borrowers for the purposes at hand, gross interest payments are of more interest. second, the published data show a level of interest expenses in the recent past which seems too low relative to what is implied by the level of debt and prevailing interest rates, both of which are fairly readily observable. from the december quarter 2000, the figures here use rba staff estimates which vary the implied interest rate in line with the cash rate. the upward trend in debt servicing is clearer in the lower line in the graph, which shows the debt servicing requirement specifically for housing debt. currently, about 6 per cent of household disposable income is devoted to servicing the interest cost of mortgages. this is higher by about 1 percentage point than the peak value in 1990, despite the much lower level of mortgage interest rates, because the size of mortgage debt outstanding is now so much higher. allowing for principal repayments as well as interest would increase this by about 2½ percentage points, an amount which is likely to be larger now than in the past because of the higher levels of debt. the fact that total interest servicing costs - i. e. those for mortgages and other loans - were so high in 1990, so that the divergence between these two lines is greatest at that time, reflects two factors. first, personal loans were a much larger share

at work, i would be comfortable, given the greater stability in interest rates, in concluding that there had not been a significant increase in the risk profile of the household sector. but other factors have also been at work, and i cannot help but think they are the result of the overconfidence that follows the experience of a strong and sustained economic expansion. much as i think the expansion has a good deal further to run, i suspect that a significant number of households have chosen a debt level which makes sense in good times, but does not take into account the fact that bad times inevitably will occur at some time or other. the other factors that have been at work show up as a modest rise in the aggregate debt - servicing ratio and a similar rise in the aggregate gearing ratio. these are not because the maximum risk a typical household faces during its life cycle is larger than it formerly was, but because many more households are now staying at or near their maximum risk position for a longer period. the other development that has clearly increased risk is the exceptionally fast increase in borrowing for residential property for investment purposes, and the accompanying rapid expansion in apartment building, which show all the signs of a seriously over - extended market. as far as we can judge at this stage, the rise in household debt does not pose a significant danger of a financial crisis, i. e. the failure of significant financial institutions such as occurred in the early 1990s after the build - up in corporate debt. but it does suggest that household consumption will be a lot more sensitive to economic conditions than hitherto. thus, we should expect a more pronounced cutback in there is some anecdotal evidence of a small relaxation in lending standards in that the proportion of ‘ high loan to valuation ’ loans has risen somewhat, and the emergence of the non - conforming lenders has meant that some borrowers who could not meet the standards of the traditional lenders can now obtain housing loans. consumption if adverse economic conditions occur. this increased sensitivity also has implications for monetary policy, a development we have been aware of for some time. at present, there are some tentative signs that both household borrowing and residential property development may be levelling out. there is no doubt that those developments, followed by a further scaling back, would be in the longer - term interest of the australian economy. appendix some measurement issues debt servicing one of the important aspects of any assessment of the sustainability of debt burdens is the extent of an economic entity ’