The Reserve Bank of Australia (RBA) has cautioned that while the number of borrowers in financial difficulty remains small, it could increase if the economy slows more than anticipated or interest rates stay higher for longer. In its semi-annual financial stability review, the bank noted that Australia's financial system continues to demonstrate high resilience despite overseas challenges, including a faltering Chinese economy.
According to the review, around 5% of owner-occupiers with variable-rate mortgages have incomes insufficient to cover essential expenses and scheduled repayments. However, fewer than 1% of such loans are more than 90 days in arrears, a level expected to remain near pre-pandemic figures. The RBA emphasised that the vast majority of borrowers are servicing their debts, and the revival in property prices means negative equity is rare.
The report comes after the RBA left its key interest rate unchanged for the seventh consecutive meeting, with markets increasingly expecting a cut next. While pressures on borrowers may ease even without lower rates due to falling inflation and the implementation of Stage 3 tax cuts, business conditions remain challenging, especially for smaller firms. Insolvencies have risen sharply since pandemic support ended, though they are only slightly above pre-pandemic levels as a share of all businesses.
The RBA identified three external vulnerabilities: China's property market weakness, high geopolitical tensions in Ukraine and the Middle East, and policy uncertainty from upcoming elections. It warned that financial stress in China could spill over to Australia through increased market risk aversion, slower global activity, lower commodity prices, and reduced demand for Australian goods. Climate change also poses risks, potentially leading to unexpected losses for lenders and insurers.
