RBA Notes China Risk, Optimism on Australian Household Finances
The Reserve Bank of Australia (RBA) has highlighted potential risks stemming from financial instability in China, while together expressing growing confidence in the financial health of Australian households.
According to the RBA, a important disruption to financial stability within China would likely impact the Australian financial system indirectly, primarily through shifts in global risk sentiment adn established trade relationships.
However, the RBAS assessment of the domestic situation is increasingly positive. Despite navigating a period of rapid interest rate increases and rising consumer prices, the majority of Australian households with mortgages are successfully maintaining their repayments and retain substantial savings. Currently, the RBA estimates approximately 2% of households with variable owner-occupier loans are spending beyond their income. Importantly, over half of these households possess savings buffers sufficient to cover at least six months of their current shortfall.
The RBA noted a positive trend in household income, stating, “Real disposable income per capita – that is, after income tax and interest payments and adjusted for inflation – has increased over recent quarters to be slightly above pre-pandemic levels.” This improvement is attributed to factors including rising real wages (as inflation cools), recent income tax cuts, and a moderation in interest rates.
Stress testing conducted by the RBA suggests resilience even in a severe economic downturn. Modelling a scenario involving a 10% unemployment rate, a 4% decline in GDP, and a 40% drop in house prices, the RBA anticipates that fewer than 4% of borrowers would default on their loans. Furthermore, most of those borrowers would still hold sufficient equity in their properties to avoid losses for their lenders upon sale.
Despite this positive outlook, the RBA emphasizes the importance of maintaining sound lending standards, particularly as house prices rise and the government’s first home deposit guarantee scheme expands. The RBA supports the Australian Prudential Regulation Authority’s (APRA) decision to maintain current macroprudential settings, recognizing that any relaxation could exacerbate existing financial vulnerabilities. APRA currently requires lenders to assess borrowers’ ability to service loans at a rate 3 percentage points higher than the advertised interest rate – for example, testing affordability at 8.5% for a loan with a 5.5% interest rate – effectively limiting borrowing capacity. The RBA also supports APRA’s efforts to ensure a range of tools are available for swift deployment should macroprudential risks emerge.