And thirdly, of course, higher leverage means that monetary policy’s impact via its effect on the behaviour of borrowers will be bigger than in the past - especially in a country like Australia where the majority of household debt is at floating rates. The asset price channel of policy might also end up being bigger. We have watched these developments with rather mixed feelings.
For some years, the most plausible explanation for the trends I have just described was that there were good fundamental reasons for a change in households’ balance sheets.