RBA Says Share of Borrowers in Early Financial Stress Is Growing

A growing number of Australian households are in the early stages of financial stress, while lenders remain in a solid position to absorb loan losses if needed, the nation’s central bank said.

(Bloomberg) — A growing number of Australian households are in the early stages of financial stress, while lenders remain in a solid position to absorb loan losses if needed, the nation’s central bank said.

“A small but rising share of borrowers are on the cusp, or in early stages of financial stress,” the Reserve Bank said in its semi-annual Financial Stability Review released in Sydney on Friday, pointing out that the share of borrowers falling behind on mortgage payments has “begun to pick up from a low level.”

The report comes as the RBA’s most aggressive tightening cycle in more than three decades has raised concerns over the outlook for Australia’s heavily indebted households at a time when a large chunk of loans fixed at record-low rates during the depth of the pandemic come up for renewal. There are also risks for Australian lenders who compete intensely in the vast mortgage market.

The RBA has paused at its past four meetings after raising interest rates by 4 percentage points in 14 months to what it calls a “restrictive” level of 4.1%. Money market bets imply the tightening cycle is all but done while economists are predicting one more hike to 4.35%.

Friday’s report showed that high inflation and interest rates have reduced most households’ spare cash, though the majority have been able to adjust their finances as required, including by restraining discretionary consumption, tapping their stock of savings or boosting hours worked.

Roughly half of the loans that were fixed during the pandemic have already rolled off onto higher rates since rates began rising in May 2022, with most borrowers managing the transition well, the report showed. Fixed-rate loans that are yet to expire also “do not appear materially riskier” than those have already rolled off, the central bank said.

Most households are well placed to service their debts “even if interest rates were to increase further,” the RBA said. It highlighted that Australian banks’ capital and liquidity positions are well above regulatory requirements.

“A strong labor market and sizeable savings buffers have played a key role in Australian households’ ability to adapt to a difficult economic environment,” the RBA said. “Incidences of severe financial stress are expected to increase but remain limited to a small share of housing borrowers.”

The RBA highlighted potential global factors that could have ramifications for Australia’s financial system, including China’s property sector stress, a further substantial tightening in global financial conditions and a sharp increase in unemployment in advanced economies. If these risks came to pass, the RBA said, the transmission to domestic markets would likely occur through two channels:

  • A substantial tightening in global financial conditions and disorderly adjustments in asset prices could affect domestic funding costs and access to credit, and strain balance sheets of financial institutions, households and businesses in Australia; and
  • A sharp slowdown in global growth would impact Australia via trade linkages

While risks to financial stability are elevated, the country’s lenders are “well positioned” to supply credit to the economy as they hold capital and liquid assets above regulatory requirements, the RBA said.

“Overall, Australian banks are in a strong positions to raise provisions and absorb loan losses if economic conditions worsen more than expected,” the RBA said. “The very low share of borrowers in negative equity on their loans further protect banks against credit losses.”

The central bank estimates just 0.1% of loans are in negative equity at current house prices.


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