“Household borrowing during the pandemic has cushioned the effects of the economic downturn, but it has resulted in a significant legacy of debt,” he noted.
That said, many households are now in better financial shape than they were before the pandemic, as they refinanced mortgages and paid off high-interest credit card debt during low rate conditions, Moody’s added.
Indeed, despite rising debt, the report says household defaults are unlikely to increase given the strength of labor markets and household savings.
However, the report says that rising interest rates are “reducing real consumer spending” as households have to spend more of their disposable income on debt servicing.
This drag is exacerbated by inflation, which is also weighing on consumer spending.
Low-income households are more affected by these trends, he noted.
“As growth slows, a slight rise in unemployment rates would put a financial strain on the most vulnerable households, especially those with low incomes and limited financial reserves,” he said.
At the same time, households that have used their growing debts to finance real estate investments are increasingly exposed to falling house prices.
“Risks are higher in countries like Australia, Canada and Korea, as well as China, Thailand and Vietnam, where housing valuations are more stretched, household debt levels are high and a greater share of household debt has variable interest rates,” Moody’s said. .
While lower house prices can improve affordability and reduce inequality, “households with a greater share of wealth locked up in residential real estate are more sensitive to house price movements” , says the report. “They are more likely to reduce their consumption in the face of income and wealth shocks.”
The report says risks to overall financial stability are mitigated by stricter capital rules and other banking sector reforms that were enacted in the wake of the financial crisis.