Household Liquidity Buffers and Financial Stress

Abstract

The ratio of household liquid assets to household income in Australia has increased substantially over recent decades, at both the aggregate and individual household levels. The increase in buffers has been most pronounced for households with mortgage debt and among indebted households – with those with the most debt typically holding the highest liquidity buffers. This is important from a financial stability perspective as liquidity buffers allow households to smooth their spending and maintain their debt payment obligations in the event of adverse shocks to their cash flows; as such, they are a key factor in reducing household financial stress. This article considers these trends and finds that, to the extent that rising liquidity buffers have increased household financial resilience, the risks associated with high and rising household indebtedness are unlikely to be as great as suggested by focusing on gross debt-to-income ratios alone.