The Reserve Bank of Australia has warned that the number of Australians facing financial stress could rise if the economy slows more than expected or interest rates remain high for an extended period. In its semi-annual financial stability review, the bank noted that while the vast majority of borrowers are currently servicing their debts, arrears could increase under adverse conditions.
Around 5% of owner-occupiers with variable-rate mortgages are estimated to have incomes insufficient to cover essential expenses and scheduled repayments. However, fewer than 1% of housing loan balances are more than 90 days in arrears, a level expected to remain near pre-pandemic figures. The revival in property prices has also kept negative equity cases rare, with fewer than one in 10,000 borrowers affected.
The review comes after the RBA held its key interest rate steady for the seventh consecutive meeting, and for the first time in four meetings did not explicitly consider a rate rise. With inflation falling to a three-year low and the labour market remaining strong, pressures on borrowers may ease even without lower rates, particularly with the implementation of Stage 3 tax cuts and further inflation declines expected to boost real disposable income.
For businesses, conditions remain challenging, especially for smaller firms. Business insolvencies have risen sharply following the withdrawal of pandemic support, though they are only slightly above pre-pandemic levels as a share of all businesses. Most companies remain profitable, but those exposed to discretionary spending, such as hospitality, face relatively tough conditions.
The RBA also highlighted external vulnerabilities, including weakness in the Chinese property market, which could spill over to the global economy and affect Australia via reduced demand and lower commodity prices. Geopolitical tensions in Ukraine and the Middle East, along with policy uncertainty from upcoming elections such as the US presidential vote, were also cited as risks. Climate change presents additional physical and transition risks that could lead to unexpected losses for lenders and insurers.
