The rising inflation and interest rates have put Australian households and businesses at risk of financial stress. However, the Reserve Bank of Australia (RBA) assures that the banking system is well-prepared to handle these challenges.
According to the latest Financial Stability Review by the RBA, there has been a slight increase in the share of households falling behind on their mortgage payments. The share of owner-occupiers with variable-rate mortgages whose essential expenses and mortgage costs exceeded their income is estimated to be around 5%, up from 1% in April 2022. These households have limited capacity to cut back on spending, and 30% of them are at risk of depleting their buffers within six months, increasing the likelihood of falling into arrears on their housing loans.
As interest rates have risen, more Australian households have been seeking financial counseling, indicating a growing share of borrowers on the verge of financial stress. The National Debt Helpline has reported a one-quarter increase in demand for its services compared to the low levels experienced during the COVID-19 pandemic.
Despite these challenges, the majority of households are still able to service their debts. The RBA’s liaison program with lenders has found that borrowers have been more resilient than expected in their ability to manage their debt, given the sharp rise in interest rates. Additionally, the number of borrowers in negative equity is very small, and banks are not overly concerned at this stage.
The RBA emphasizes that Australia’s financial system is well-positioned to handle global economic shocks. However, it cautions that if inflation and interest rates remain high for an extended period, it could lead to a significant deterioration in credit quality and lenders cutting back on credit provision. Disorderly declines in asset prices could also disrupt the functioning of the financial system.
While households are generally well-placed to adapt to challenging economic conditions, some are vulnerable to further shocks. The share of borrowers falling behind on their mortgage payments has started to increase, albeit from a low level. In a hypothetical scenario where interest rates rise from 4.1% to 4.6%, the share of owner-occupiers with variable-rate mortgages whose essential expenses and mortgage costs exceed their income would rise from 5% to 7%.
Overall, the RBA maintains that the banking system is in a strong position to manage any increase in arrears and limit the impact on credit provision. Australian banks have low exposure and conservative lending practices, reducing systemic risks. However, financial institutions may become more cautious about lending due to the stresses faced by households struggling to meet higher mortgage repayments.