side. an exuberant housing market in some parts of the country and strong competition among lenders raised the question of whether financial institutions had been appropriately prudent in assessing a household's ability to meet repayments. in response, a number of measures were implemented by apra and asic to strengthen mortgage lending standards. these measures have helped improve the quality of lending over the past couple of years. but there is still a large stock of housing debt out there, some of which probably would not meet the more conservative lending standards currently being imposed. how large a risk does this pose to financial stability? it depends on a number of things, including how lax the previous lending standards were, how much of the stock was lent under less prudent standards and the repayment patterns of borrowers. one way of assessing the risk though is to look at the level and trajectory of mortgage stress. http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 02 - 20. html 5 / 14 21 / 02 / 2018 household indebtedness and mortgage stress | speeches | rba measures of financial stress there is no single measure that captures the level of financial stress. there are comprehensive surveys, such as the survey of household, income and labour dynamics in australia ( hilda ) and the survey of income and housing ( sih ), that are methodologically robust, but are only available with a lag. a number of private sector surveys are more timely but it can be harder to assess whether their methodologies are well focused on financial stress. there is also information on nonperforming loans, insolvencies and property repossessions that is fairly timely and reliable, but is only an indicator of pretty severe stress. i am going to talk through a few measures and see what they imply about the current level of mortgage stress among australian households. let's start with some high - level data on debt and debt servicing. as i noted above, the average household mortgage debt - to - income ratio has been rising over recent years. in a sense, this is not really surprising. with historically low interest rates, households have been able to service higher levels of debt. indeed, the debt - servicing ratio ( defined as the scheduled principal and interest mortgage repayments to income ratio ) has remained fairly steady at around 10 per cent despite the rise in debt ( graph 2, right panel ). but these are averages. it

to principal and interest repayments as originally contracted. others may choose to extend the interest - free period, provided that they meet the current lending standards. there may, however, be some borrowers that do not meet current lending standards for extending their interest - only repayments but would find the step - up to principal and interest repayments difficult to manage. this third group might find themselves in some financial stress. while we think this is a relatively small proportion of borrowers, it will be an area to watch. conclusion the historically high levels of mortgage debt in australia raises questions about the resilience of household balance sheets to a change in circumstances and the ability of the financial system to absorb a widespread increase in household financial stress. the information we have suggests that, while there are some pockets of financial stress, the overall level of stress among mortgaged http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 02 - 20. html 13 / 14 21 / 02 / 2018 household indebtedness and mortgage stress | speeches | rba households remains relatively low. furthermore, the banking system is strong and well capitalised, and is supported by prudent lending standards. the risks to financial stability from this source therefore remain low although we will need to keep an eye on developments. appropriately prudent lending standards will continue to play an important role in ensuring that the financial system remains stable and households borrow responsibly. endnotes [ * ] i am grateful to bernadette donovan, jonathan kearns, david orsmond, grace taylor and michelle wright for assistance. these ratios differ to those shown on the earlier graph, household mortgage debt indicators, because of different coverage. the household mortgage debt indicators graph shows aggregate mortgage debt over aggregate household income ( all households, including those without debt ). the numbers in the text only cover households with owner - occupier mortgage debt and compares this debt to their income. there are shortcomings with using this indicator because it assumes living expenses are identical across households and are a constant proportion of income. however, living expenses typically rise as income rises. but high income households can often devote a larger share of their income to meeting debt repayments while meeting living expenses. this speech uses unit record data from the household, income and labour dynamics in australia ( hilda ) survey. for more information, see hilda survey disclaimer notice. © reserve bank of australia, 2001 – 2018.