Budget pressures linger, but households in fitter shape amid lower inflation, declining interest rates
The Reserve Bank of Australia has warned that the international financial environment remains precarious, even as Australian households show signs of improved resilience in the face of past rate hikes and cost-of-living pressures.
In its latest Financial Stability Review, the central bank described global risks as “elevated” and highlighted three areas of particular concern: the potential for sharp asset price corrections; the growing threat of cyber incidents; and ongoing instability in China’s property sector.
Global risks still pressing
The RBA cautioned that global markets remain vulnerable to sudden corrections, particularly as valuations in equities and other assets continue to rise with little margin for error.
It noted that hedge fund leverage, liquidity mismatches in bond funds, and heavy investor concentration in a handful of US technology stocks could turn any shock into a systemic event.
Had April’s market volatility following US tariff announcements not eased so quickly, the RBA argued, financial institutions and non-bank lenders may have faced significant strain.
The central bank also flagged a notable shift in sovereign borrowing patterns, with OECD governments increasingly issuing short-term securities, particularly in the US.
Cyber threats an emerging danger
Beyond market volatility, the RBA warned of the risk posed by cyber disruptions.
As financial institutions depend more heavily on common technology platforms – many hosted offshore – the potential for a single outage or attack to cascade across the sector has grown.
The 2024 Crowdstrike incident was cited as a reminder of how technology failures can reverberate through critical financial services.
China’s slowdown looms large
The RBA again singled out China’s struggling property sector as a destabilising factor.
With property prices there falling more sharply than Japan’s during its 1990s crash, the bank said weaknesses in Chinese real estate and local government finances could spill over into global markets.
Given Australia’s reliance on Chinese trade, such disruption would inevitably affect local financial stability.
Households showing resilience
For mortgage professionals, the most relevant takeaway is the RBA’s increasingly confident outlook on Australian borrowers.
The share of variable-rate owner-occupiers spending more than they earn has dropped to about 2%, down from nearly 5% at the peak of the tightening cycle. Crucially, more than half of those households still hold savings buffers equal to at least six months of repayments.
Real disposable income per person is now marginally above pre-pandemic levels, aided by tax relief, falling inflation, and recent rate cuts.
The central bank’s stress testing suggested that even in a scenario of double-digit unemployment and a 40% fall in housing values, fewer than 4% of borrowers would be expected to fall behind on their loans – and most would retain enough equity to sell without lender losses.
Lending standards in focus
Nevertheless, the RBA cautioned against complacency as housing activity revives and the expanded First Home Guarantee scheme draws more borrowers into the market.
The bank endorsed APRA’s decision to hold firm on its three-percentage-point serviceability buffer, which ensures new borrowers can withstand materially higher rates than those prevailing at the time of application.
While household balance sheets appear stronger, regulators are intent on ensuring credit quality remains tight.
With rates off their peak and demand returning, the challenge will be balancing accessibility for new buyers against the need to protect both borrowers and lenders from future shocks.
