About 2% of borrowers will run out of savings by 2026: RBA
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The news: The Reserve Bank has acknowledged the pressure some households are under in a high inflation and high interest rate environment, but has pointed to new figures showing around 2% of borrowers are at risk of depleting their liquid savings buffers by 2026.
This indicates a relatively low level of risk to financial stability from defaults. Pressure on household budgets is also expected to ease due to stage 3 tax cuts and declines in the inflation rate.
The numbers: The RBA further said that this 2% of the cohort would also not necessarily default and could instead make other "often difficult" adjustments to their lifestyles to make ends meet, including selling their property or reducing other expenses. Though the central bank noted these options may not be available for all of those in this position.
If inflation remains higher for longer than expected, and interest rates are not eased, the proportion of borrowers under stress is expected to climb. A sharper rise than anticipated in unemployment could also have this effect.
Less than 1% of all owner-occupied housing loan balances are 90 or more days in arrears. This is expected to increase slightly but to remain close to pre-pandemic levels. Just 0.5% of loans in arrears are also in negative equity, with the debt larger than the value of the home. Considering all loans, this amounts to 0.01% that are both in arrears and negative equity.
About 5% of variable rate owner-occupier borrowers are estimated to have essential expenses and repayments exceeding their income.
More than 70% of borrowers have enough in prepaid savings buffers, such as in offsets and redraws, to meet their expenses and mortgage repayments for six months should they become unemployed.
The context: The RBA's Financial Stability review considers both global and domestic risks. Household savings buffers are a major focus for local economists, alongside global challenges.
Upcoming global elections that could "result in further geopolitical fragmentation", climate change, digitalisation, geopolitical tensions and China's economic downturn were all listed as potential offshore risks.
The RBA included a focus topic on artificial intelligence, noting it is “already having a substantial impact” on how the financial system operates. It said the use of AI has already brought about economic benefits in terms of efficiency and productivity and enhancing risk management.
It also recognised both benefits and risks for financial stability, including operational risk from the concentration of service providers, herd behaviour and market correlation, increased cyber threats and risks around data, models and governance.
What they said: “Despite budget pressures remaining elevated, most borrowers were able to continue servicing their debts and covering their essential costs without dipping into their savings over the first half of 2024,” the RBA’s Financial Stability Review for September said.
“The share of variable-rate owner-occupier borrowers persistently drawing down on their offset and redraw balances is higher than before the pandemic; the share of borrowers persistently adding to these balances is also lower. However, these shares have remained relatively stable over the past six months, and in aggregate households are still adding to their mortgage buffers.
“While conditions will remain challenging for the group of borrowers already experiencing acute budget pressures, our projections imply that most mortgagors would remain able to service their debts.”
