. as housing prices rise, people need to borrow more to purchase a home and with more ability to borrow, people can bid up the prices of housing. so one place to look for a metro / regional distinction might be housing prices. while there is clearly a difference in the absolute level of housing prices in cities and regional areas, over the long sweep, movements in housing prices in the regions have pretty much kept up with those in capital cities ( graph 7 ). this graph shows an index of housing prices for each of the states broken down into capital city and rest of the state. while there are periods where growth in housing prices diverge, most obviously in nsw and victoria in recent years, they follow a very similar pattern. this partly reflects the fact that some cities that are close to the capitals tend to experience similar movements in house prices as the capitals. https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 10. html 9 / 13 10 / 09 / 2018 the evolution of household sector risks | speeches | rba graph 7 what about housing debt in regional areas? the data suggest that the incidence of household indebtedness is broadly similar in the capital cities and in the regions ( graph 8 ). in 2015, the latest year for which we have data, around 50 per cent of regional households were in debt compared with around 45 per cent of households in capital cities. but in previous years this was reversed. at a broad level, the proportion of households in debt seems fairly similar. https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 10. html 10 / 13 10 / 09 / 2018 the evolution of household sector risks | speeches | rba graph 8 incomes and housing prices tend to be lower on average in regional areas than cities so we might expect debt to also be lower. but how do debt - to - income ratios compare? this next graph shows debt - to - income ratios for cities and regional areas at various points over the past 15 years ( graph 9 ). in general, average debt - to - income ratios for indebted households in capital cities tend to be a bit higher than those for indebted households in regional australia. but it is not a huge difference and it mostly reflects the fact that people with the highest incomes – and therefore, higher capacity to manage higher debt - to - income ratios – tend to be

. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 10. html 3 / 13 10 / 09 / 2018 the evolution of household sector risks | speeches | rba graph 3 the risk that difficulties in the residential real estate market translate into stability issues for the financial institutions, however, appears to be currently low. the australian banks are well capitalised following a substantial strengthening of their capital positions over the past decade. while lending standards were not bad to begin with, they have nevertheless tightened over the past few years on two fronts. the australian prudential regulation authority ( apra ) has pushed banks to more strictly apply their own lending standards. and apra has also encouraged banks to limit higher risk lending. lending at high loan - to - valuation ratios has declined as a share of total loans, providing protection against a decline in housing prices for both banks and households. and for loans that continue to be originated at high loan - to - valuation ratios, the use of lenders'mortgage insurance protects financial institutions from the risk that borrowers are unable to repay their loans. overall, arrears rates on housing loans remain very low. but the second potential vulnerability – from high household indebtedness – is that if there were an adverse shock to the economy, households could find themselves struggling to meet the repayments on these high levels of debt. if they have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans. this could have adverse effects on the real economy – for example, in the form of lower economic growth, higher unemployment and falling house prices – which could, in turn, amplify the negative shock. so what do the data tell us about the ability of households to service their debt? this graph shows the ratio of household mortgage debt to income ( a subset of the previous graph on household total https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 09 - 10. html 4 / 13 10 / 09 / 2018 the evolution of household sector risks | speeches | rba debt ) on the left hand panel and various serviceability metrics on the right hand panel ( graph 4 ). the mortgage debt - to - income ratio shows the same pattern as total household debt - to - income – rising up until the mid - 2000s then steadying for a few years before increasing again from