Most of Australia’s mortgage holders have been able to adjust to higher interest rates, with “close to 99%” of loans remaining on or ahead of repayment schedules, according to the head of the Reserve Bank’s financial stability unit.
In a speech in Sydney on Friday, Andrea Brischetto said that while the number of borrowers in “severe financial stress” had risen, most had been resilient and “even in the case of an economic downturn, this is likely to remain the case”.
A strong labour market meant households had managed to increase hours of work, switch to higher-paying jobs, draw down on savings or cut consumption, she said.
“These adjustments have meant that, to date, the substantial pressure on households’ budgets has not translated into a sharp increase in late-stage financial stress,” Brischetto said. “Both loan arrears and personal insolvencies (business-related and other) have increased from their low levels during the pandemic, but most households continue to be able to service their debts.”
The assessment comes days after September-quarter GDP figures were released by the Australian Bureau of Statistics. These showed that per-capita incomes sank by 0.5% while the household saving-to-income ratio fell to 1.1% – the lowest level since the December quarter of 2007.
Just over 20% of variable-rate owner-occupier borrowers were now devoting more than 30% of their income to mortgage payments, Brischetto said, citing one gauge often used to describe financial stress.
But data – including the Melbourne Institute’s Household Expenditure Measure – showed “around 95%” of such borrowers still had spare income after meeting mortgage payments and essential expenses.
Less than 2% were estimated to have both an income shortfall and a low savings buffer, and “so could fall into severe financial stress within six months” assuming interest rates remained at current levels, she said. Those on lower incomes were over-represented among this group.
With house prices lately on the rise again, “much less than 1% of loans are estimated to currently be in negative equity” where a forced sale would deliver proceeds of less than the loan on the property, Brischetto said.
Prudential measures also meant lenders were “well-placed to withstand such losses while continuing to lend to households and businesses, and thus supporting economic activity even in very challenging economic conditions”, she said.
Separately, the treasurer, Jim Chalmers, on Friday released an updated statement on the conduct of monetary policy, confirming the government’s commitment to the central bank’s independence.
The RBA’s target for inflation remains between 2-3%, with monetary policy set to ensure price rises return to the mid-point of that range. The “appropriate timeframe” for reaching that goal depended “on economic circumstances”, the statement said.
But the bank’s objectives also include “sustained full employment”, defined as the current maximum level of employment consistent with low and stable inflation.
“More generally, when inflation is expected to be significantly away from the midpoint of its target of between 2-3% or labour market conditions are expected to deviate significantly from those consistent with full employment, the board commits to communicating how long it expects it will be before it again meets each of its objectives and why,” the statement said.
Michele Bullock, the RBA governor, was asked by Guardian Australia last month which the bank would prioritise between rising inflation and an increase in the jobless rate.
“I think what will be really important in deciding between those scenarios is what’s happening [with] inflation expectations,” Bullock told a dinner of economists. “So if it was a choice between tightening [rates] further, even though unemployment’s going up, we would probably be … thinking that inflation expectations are a danger of becoming de-anchored.”
Other changes outlined in the conduct statement include plans to publish unattributed records of how the nine members on the new monetary policy board vote. The RBA will also release board papers after five years to improve transparency.
Members of the new specialised board would also conduct “at least one speech or public engagement each year”, it said.
