Australia’s central bank warns of rising financial stability risks, households under pressure

Published Fri, Oct 7, 2022 · 08:42 AM

AUSTRALIA’S central bank on Friday warned financial stability risks have increased over recent months as interest rates rise, and pressures on Australian household budgets and business cashflows are rising while housing prices are declining.

In its semi-annual financial stability review, the Reserve Bank of Australia (RBA) said some households are already feeling the strain from higher interest rates and inflation, after six consecutive rate hikes since May, and this will likely continue for some time.

The bank noted that the global economy and financial system are facing considerable uncertainty, including high inflation, rising interest rates and high energy prices. These forces are also at play in Australia, along with a marked softening in housing market conditions.

“Financial stability risks would be magnified by a further substantial tightening in global financial conditions,” said the RBA in its 70-page review.

The bank said a small number of borrowers that have both high debt relative to their income and low saving and equity buffers are particularly vulnerable to shocks, while business insolvencies have also picked up to pre-pandemic levels, including in sectors where cost pressures are acute.

These factors were one reason the central bank unexpectedly slowed the pace of rate hikes this week by raising the official cash rate by 25 basis points to a nine-year peak of 2.6 per cent. That followed four outsized moves of 50 basis points.

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The rate hikes already delivered will add around A$800 a month in repayments to the average A$620,000 mortgage, a deadweight for a population that holds A$2 trillion (S$1.86 trillion) in home loans.

House prices have also slid for five months in a row, led by big drops in Sydney and Melbourne. That drop combined with losses in pension funds cut A$484 billion from household wealth in the three months to June, and an even larger decline is likely in the September quarter.

However, the RBA also noted many Australian households and businesses built up substantial savings buffers during the pandemic, and strong growth in incomes has supported the recovery in household consumption and contributed to low levels of loan arrears.

Banks in Australia remain liquid and very well capitalised, the RBA said.

In the period ahead, the bank expects housing loan arrears rates to increase from the current low levels, citing that fix-rate borrowers, which accounted for 40 per cent outstanding loans during Covid-19, will also face large increases in their loan payments when their terms expire.

Total scheduled payments on housing loans are projected to increase to around 9 per cent of household disposable income by the end of 2023.

“The outlook for financial stability over the coming years will hinge in large part on the ability of households and businesses to weather challenging economic conditions both in Australia and internationally,” said the RBA. REUTERS

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