RBA says household financial stress is rising from low levels

The news: The Reserve Bank says a growing number of Australian households are in the early stages of financial stress due to higher interest rates, but it expects most households and businesses to adapt to the challenging economic conditions.

The numbers: The RBA’s half-yearly Financial Stability Review has estimated most borrowers with variable rate mortgages have seen payments rise by 30% to 50%, while many with lower fixed rate loans will see similar increases when their loans roll over. As a result, the share of owner-occupiers whose loan costs and essential expenses exceed their incomes has increased to around 5%, up from 1% in early 2022. Using a broader measure of expenses, that share could be as high as 13%, the RBA said.

The context: The report comes amid the RBA’s most aggressive tightening cycle in over three decades as it tries to curb high inflation. The central bank has lifted interest rates to a decade-high of 4.1%, although it has put rate hikes on hold for the past four months. Despite the rising levels of stress, the RBA believes Australian banks are more than well-capitalised to absorb rising arrears or losses on loans. Instead, it highlighted offshore risks, including China’s property sector stress and a further substantial tightening in global financial conditions as areas of concerns for the Australian economy.

What they said: “A small but rising share of borrowers are on the cusp, or in early stages of financial stress.”