RBA Notesโ China Risk, Optimism on Australian Household Finances
The Reserve Bankโ ofโค Australia (RBA) has highlighted potential risks stemming fromโค financial instability in China, while together expressing growing confidence in the financial health of Australian households.
According toโ the RBA, a important disruption to financial stability within Chinaโ would likely impact the Australian financial system indirectly, primarilyโฃ through shifts in global risk sentiment adn established โtrade relationships.
However,โ the RBAS assessment of theโข domestic situation is increasingly positive. Despite navigating a period โof rapid โinterest rate increases and rising consumer prices, the โmajority of Australian households with mortgages are successfully maintaining their โขrepayments and retain substantial savings. Currently, the RBA estimates โคapproximately 2% of households with variable owner-occupier loans areโ spending beyond their income. Importantly, over half of these households possess savings buffers sufficient to cover at least six โขmonths of โtheir current shortfall.
The RBA noted a positive trend inโฃ household income, โฃstating, “Real disposable โฃincome per capita – that is, after income tax and interest paymentsโ and adjusted โขfor inflation – has increased over recent quarters to be slightly above pre-pandemic โฃlevels.” โThis improvement is attributed to factors including rising real โขwages (as inflation cools), recent income tax cuts, and a moderationโข in interest rates.
Stress testing conducted by the RBA suggests resilience even in a severe โeconomic downturn. โModelling a scenario involving a โค10% unemploymentโฃ rate, โa 4%โ decline โin โGDP, and a 40% drop in house prices, the RBA anticipates that โfewer than 4% โof borrowers would defaultโข on their loans.โค Furthermore, most of those borrowers would still hold sufficient equity in theirโ properties to avoid losses for their lendersโ upon sale.
Despite this โขpositive outlook, the RBA emphasizesโฃ the importance of maintaining sound lending standards, particularly as house prices rise and the government’sโฃ first home deposit guarantee โคschemeโค expands. The RBA supports the Australian Prudential Regulation Authority’s (APRA) decision to maintain current โคmacroprudential 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 interestโ rate – for example, testing affordability at 8.5% for a loan with โขa 5.5% interest rate – effectively limiting borrowing capacity. The RBA also supports APRA’s efforts to โensure a range of tools are available for swift deployment should macroprudential risks emerge.
