Australian homes and businesses are vulnerable to financial stability risks as rising inflation and interest rates continue to pressure the global economy.
A growing share of Australian households have also been seeking financial counselling as interest rates have risen, with a small but rising share of borrowers on the cusp of financial stress, or already in its early stages.
The latest Financial Stability Review released on Friday by the Reserve Bank says the share of owner-occupiers with variable-rate mortgages whose essential expenses and mortgage costs exceeded their income in July 2023 is estimated to be around 5 per cent, up from around 1 per cent in April 2022.
It says these households are likely to have little capacity to cut back on spending, and 30 per cent of them are at risk of depleting their buffers within six months – and so are at higher risk of falling into arrears on their housing loan
The review of Australia’s financial system is updated every six months.
In Friday’s release, it says if inflation and interest rates remain high for an extended period, it could lead to a significant deterioration in credit quality that “could lead to lenders cutting back on the provision of credit”.
It warns that “disorderly declines in asset prices” could disrupt the functioning of the financial system.
While stressing that Australia’s banks are well-positioned to absorb any shock, the review says financial institutions could become more cautious about lending given the stresses on households struggling to meet higher mortgage repayments.
“In an adverse scenario where growth slows and unemployment rises more than expected, loan losses for banks would increase,” the review says.
However, it says high provisioning and capital levels “leaves banks well-placed to manage the increase in arrears limiting the impact on credit provision in the economy”.
“Systemic risks are limited due to Australian banks’ low exposure and conservative lending practices,” it says.
When it comes to Australian households, the review says households are well-placed to adapt to challenging economic conditions, but warns that “some are vulnerable to further shocks”.
“Of these borrowers, about 30 per cent are at risk of depleting their buffers within six months (equivalent to 2 per cent of all variable-rate owner-occupier borrowers),” it says.
It says those households would need to draw down on available savings buffers or find other margins of adjustment, such as additional work, to meet their essential expenses and scheduled mortgage payments.
But the review says “the vast majority of households” are continuing to service their debts, even though variable rate borrowers, who account for three-quarters of all loans, have seen repayments increase between 30 per cent and 50 per cent since May 22 when interest rates started rising from 0.1 per cent.
The review singles out China as a major global risk where stress in the country’s ailing property sector and other imbalances could spread to the rest of the Chinese economy and “reverberate globally”.
Other potential flashpoints include banking systems in the United States and Switzerland where global financial risks remain “elevated” despite intervention by governments to provide support and in the case of Credit Suisse, a forced takeover by rival UBS.
Global sharemarkets have been volatile in recent days on fears that interest rates in the United States will stay higher for longer given resilient inflation.
The Reserve Bank left interest rates steady at 4.1 per cent earlier this week, but some economists think fears about inflation and rebounding real estate prices could prompt a November rate hike on Melbourne Cup Day.
(ABC)
