In its six-monthly examination of the state of the financial system,the bank said one in 20 borrowers on variable interest rates were in negative cash flow as they struggled to repay their mortgage,but the rest were finding ways to make ends meet.
Financial risks are contained,says the Reserve Bank,despite the impact of higher interest rates on borrowers.Peter Rae
Real disposable income per person has fallen 7 per cent since early 2022,when the RBA started lifting interest rates,in effect wiping out the gains most households had enjoyed due to pandemic-era government stimulus,low inflation and record-low borrowing rates.
The bank this week,saying the economic and inflation outlook was balanced in comments analysts interpreted to mean more rate rises were off the RBA’s agenda. But that changed after on Thursday,which showed the unemployment rate falling sharply to 3.7 per cent.
Despite the tight jobs market,the economy has been slowing. was just 0.2 per cent,while in per capita terms the economy has been in recession for the past nine months.
In its financial stability report,the Reserve Bank admitted that higher interest rates on top of inflation and a growing tax take were making life difficult for many borrowers,but said this would come to an end.
“Much of this year will remain challenging for borrowers already under pressure. The expected decline in the share of borrowers with a cash-flow shortfall only occurs later in 2024,” it said.
“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.”
Since the bank started lifting interest rates,it estimates scheduled repayments on mortgages have climbed by between 30 and 60 per cent. Australian owner-occupiers repaid a record $28 billion on their mortgages through the final three months of 2023.
Noting there had been an increase in the number of borrowers seeking relief from their banks or getting support from charities,the RBA said those already in negative cash flow were making substantial changes to their lifestyles to get by.
Australia's unemployment rate has fallen sharply to 3.7 per cent,a large drop from last month's figure of 4.1 per cent.
“In addition to cutting back their spending to mostly essential items and trading down in quality for some goods and services,these households have had to make other adjustments to continue servicing their mortgages,” it said.
“These include drawing down on liquid savings,selling assets and working additional hours. Lower-income borrowers are more likely to be in this group.”
The bank estimates about half of all borrowers have sufficient buffers – via offset and redraw balances on their mortgages – to service their debts and essential expenses for at least six months.
But another 45 per cent would struggle if the economy were to slow and unemployment climbed.
A jump in the jobless rate remains one of the biggest risks,but the bank said the state of the Chinese economy and the commercial property market – in which many overseas banks have large exposures – were also potential threats if either or both were to deteriorate.
If inflation were to remain higher for longer,a small number of borrowers close to negative cash flow would have to “make further difficult adjustments to their finances”.
National Australia Bank’s head of market economics,Tapas Strickland,said the report showed the Reserve Bank believed risks to the financial system remain contained.
“The RBA’s analysis highlights the role the strong labour market has played,allowing mortgaged households to retain and find more work (including through more hours),” he said.
“Households also entered the pandemic in a strong financial position,which has continued in the post-pandemic environment.”
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