About one in 20 owner-occupiers on variable-rate mortgages are spending more than they earn because of higher interest rates and cost-of-living increases but that share should halve by the end of 2025, the Reserve Bank said in its latest financial stability review.
The semi-annual report, released on Friday, was generally upbeat about the financial health of households and businesses, finding “nearly all borrowers continue to service their debts on schedule” even though conditions are likely to remain challenging for many this year.
Most borrowers remain able to service their debts, even as debt servicing costs have risen about 30-60% since the RBA started hiking its cash rate in May 2022. However, about 5% of owner-occupiers on variable rate loans face expenses exceeding income, with lower-income borrowers most likely to be in this category.
However, many of those with negative cash flow still have savings to draw upon. Those with both low buffers and more money leaving than being received make up less than 2% of the total number of owner-occupiers with loans although the share has risen sharply over the past two years.
Less than 1% of all housing loans were 90 or more days in arrears, the report said.
The outlook for borrowers, though, should start to improve provided the economy evolves as predicted, halving the share of those with negative cash flow by the end of next year.
“The cumulative effect of moderating inflation, higher real wages and a lower cash rate over the next two years will help to ease pressure on borrowers with stretched finances,” it said.
The report noted the “strong labour market” had supported household incomes and the ability to finance debt. That support may be even stronger than the RBA anticipated with the jobless rates unexpectedly diving to 3.7% last month from 4.1% in January, with a bumper 117,000 extra jobs generated, the Australian Bureau of Statistics said on Thursday.
In its quarterly forecasts released last month, the RBA expected the jobless rate to reach 4.2% by June.
The financial stability review notably did not model the impact of the revisions to the stage 3 tax cuts that take effect from 1 July. The amendments trimmed the tax cuts being received by those earning more than about $160,000 a year, distributing them to those earning less.
The review assumed the RBA’s cash rate would be down to 3.9% by the end of 2024, or about two 25 basis-point cuts from its current level, based on market forecasts in February.
With household finances generally holding up, the share of bank loans in default remained “relatively low, reflecting the resilience of the Australian economy and banks’ prudent lending standard over recent years”.
Loans with payments overdue for less than 90 days have “continued to tick up gradually” and are expected to continue to increase in part because of weak household consumption.
The larger threats to the domestic financial system may come from abroad. Among the global risks was the state of the Chinese economy, where further weakness of that nation’s property market could dim growth prospects in Australia’s biggest trading partner.
“If stresses in the Chinese economy and financial system intensified or broadened, they could spill over to the rest of the world (including Australia) through trade channels and an increase in global risk aversion,” it said.
Similarly, should the anticipated soft landing in the global economy - with inflation ebbing but unemployment levels remaining subdued - not transpire, financial markets could be “vulnerable to an adverse shock”.
Other threats, though, continue to build including from “cyber-attacks, risks associated with climate change and geopolitical tensions”, the report said.
Australia’s mortgage holders are faring better than expected as on-going strength in the labour market enables most people to keep up with rising debt repayment levels, the Reserve Bank said in its quarterly financial stability report.
• This article was amended on 22 March 2024 to remove an incorrect reference to the RBA financial stability review being released quarterly. It is a semi-annual report.
