RBA update on household financial stability
Written and accurate as at: Apr 28, 2022 Current Stats & Facts
The RBA recently released their semi-annual financial stability review report. This report provided an update on the health of Australia’s financial system, including discussing any potential risks identified by the bank.
The RBA said the Australian financial system remains resilient despite recent global developments, highlighting strong business and household balance sheets and low loan arrears rates. The RBA flagged several critical risks to the Australian and international financial systems, including falls in property or financial asset prices. Possible triggers include an excessive increase in interest rates, an increase in risk aversion and weak income growth.
Household debt levels are high in Australia and around the world. These high levels of debt may impact the ability of borrowers to repay loans as interest rates increase. The RBA also identified elevated cyber security risks for Australian financial institutions, noting the increasing prevalence of cyberattacks.
The RBA provided insights surrounding possible scenarios for Australian borrowers as interest rates rise. The RBA estimates that the median borrower has around 21 months’ worth of mortgage repayments in excess savings. The buffer is estimated to fall to 19 months if interest rates rise by 200 basis points. This buffer is considerably more significant than before the pandemic when households were estimated to have approximately ten months’ worth of mortgage repayments in excess savings.
The RBA also noted that while debt-to-income ratios have increased from already high levels, loan-to-valuation ratios (LVRs) haven’t increased as much. Only around 5% of loans have an outstanding LVR higher than 75%. This proportion compares to almost 25% at the start of 2020. The incidence of household financial stress has also declined and is lower than before the pandemic. The share of non-performing housing loans was just 0.9% at the end of 2021, with almost all borrowers exited from COVID-19 loan deferral arrangements now up to date on repayments.
Notwithstanding the overall strength of borrowers’ balance sheets, the RBA expects a small share of borrowers to struggle to service their debts due to higher interest rates and inflation. Risks are higher for borrowers with high LVR and high debt-to-income ratios or households susceptible to potential income reductions.
The RBA estimates that a 200 basis point increase in interest rates could lower real house prices (i.e. adjusted for inflation) by around 15% over two years compared to if interest rates remained unchanged. However, given only a small share of borrowers have high LVR ratios, the RBA doesn’t expect this to cause significant financial stress for borrowers.