Although
global financial systems have held up during the COVID-19 global
pandemic, by April 2022 the Russian invasion of Ukraine and
subsequent risk of financial stress caused by sanctions had become a factor in the international financial
equation. Thus far any risk for Australia's economy appears to be considered manageable.
However,
with interest
rates expected to begin to rise again by June 2022, real
wages growth still in what has been an 8 year-long stagnation with no
light on the horizon, home
insurance rates predicted to rise by more than 10 per cent
on the back of widespread flooding on the Australian east coast, a continuing shortage
of affordable housing stock with overall housing
supply also expected to significantly drop and, annual residential rental growth continuing to rise sharply, the next few
years may not be as manageable for some households.
Here
are excepts from the Reserve Bank’s assessment of household and
business finances.
Reserve
Bank of Australia, Financial
Stability Review April 2022,
Household and Business Finances:
The
incidence of household financial stress is low and declining, but a
small share of households are vulnerable to cash flow shocks …
The
share of APRA-regulated lenders’ non-performing housing loans was
just 0.9 per cent at the end of 2021 – lower than before the
pandemic (see ‘Chapter 3: The Australian Financial System’).
Almost all borrowers
who have exited loan payment deferral arrangements available earlier
in the pandemic are now up to date with their repayments.
The recent strength in employment is likely to have offset the
unwinding in fiscal policy support for most indebted households. For
the small number of borrowers who are currently experiencing
repayment difficulties, liaison with banks indicates that the vast majority
had been experiencing problems prior to the pandemic, and that early
indicators of financial stress in other borrowers (such as households
reducing their prepayments) remain very low.
Households
in flood-affected areas of New South Wales and Queensland are facing
significant challenges. To alleviate near-term financial
challenges, government disaster-relief payments and hardship
assistance from lenders have been made available. Recent estimates suggest
that the number of insurance claims is higher than following the 2011
Queensland floods and Cyclone Yasi; although, to date, the total
value of claims has been lower as fewer homes require rebuilding.
Banks direct exposures to the most heavily affected households are
small relative to total lending.
More
broadly, the small share of borrowers with low liquidity buffers are
more likely than other borrowers to have their financial resilience tested
if they experience an adverse shock to their incomes or expenses,
including through higher inflation. The risks for households with low
liquidity buffers are likely to be even higher for those whose
payment buffers have been declining (as opposed to low and stable)
and for those who also have high levels of debt. The Securitisation
data indicate that, for owner-occupiers with variable-rate loans, the
overall share
of borrowers with a loan six or more times their income and a buffer
of less than one month of minimum repayments has declined since
the beginning of the pandemic, to just below 1 per cent (Graph 2.4).
The share of owner-occupier variable-rate borrowers with low and
declining buffers has decreased to around 2 per cent over the same
period. Declines
in the shares of both groups of vulnerable borrowers are partly due
to lower interest rates.
Historically,
renters have been more likely to experience financial stress than
indebted owner-occupiers. According to the Household, Income and
Labour Dynamics in Australia (HILDA) survey, around one-third of
renters reported at least one instance of financial stress (such as being
unable to pay a bill on time or heat their home) in 2020, compared to
one-sixth of owner-occupiers (Graph 2.5). Although renters are unlikely
to pose direct risks to the stability of the financial system (as
they have less debt), financial stress for renters could translate to repayment
difficulties for indebted landlords or pose indirect risks by
constraining household consumption and so economic activity. Renters with
a combination of low liquidity buffers prior to the pandemic
(equivalent to less than one month of disposable income) and high
housing cost burdens (rental payments equivalent to more than 30 per
cent of disposable income) were much more likely to report financial
stress than other households. Around 15 per cent of renters were
vulnerable based on this metric in 2020.
Although
the value of consumer debt has declined over recent years, there has
been strong growth in households using buy now, pay later (BNPL)
services. BNPL services are generally a form of short-term financing
that allow consumers to pay for goods and services in
instalments. It is estimated that the value of BNPL transactions
increased by around 40 per cent over the year to the December quarter
of 2021, and the total number of BNPL accounts was equivalent to
around one-third of the adult population (although some people have
more than one account). There have been some increases in the
incidence of late payments on these products. However, the value of
BNPL transactions remains relatively small compared to other forms of
personal finance, with the value of domestic personal credit and
charge card purchases on Australian issued cards around 15 times
larger than BNPL transactions in the December quarter of 2021.
… including
a small share of borrowers who could struggle to service their debts
as a result of higher interest rates and/or inflation
….Around
60 per cent of all borrowers currently have variable-rate loans, with
around two-thirds of these being owner-occupiers. Scenario analysis
using information in the Securitisation dataset indicates that if
variable mortgage rates were to increase by 200 basis points:
•
just
over 40 per cent of these borrowers made average monthly payments
over the past year that would be large enough to cover the increase
in required repayments (Graph 2.6)
•
a
further 20 per cent would face an increase in their repayments of no
more than 20 per cent
•
around
25 per cent of variable-rate owner-occupiers would see their
repayments increase by more than 30 per cent of their current
repayments; however, around half of these borrowers have accumulated
excess payment buffers equivalent to one year’s worth
of their current minimum repayments that could therefore help ease
their transition to higher repayments
•
the
share of borrowers facing a debt servicing ratio greater than 30 per
cent (a commonly used threshold for ‘high’ repayment burdens)
would increase from around 10 per cent to just under 20 per cent.
One
caveat is that households’ average monthly mortgage payments over
the past year may have been larger than might reasonably be expected
going forward, especially as previous spending patterns resume
alongside the recovery in economic activity. It is difficult to draw
inferences about the capacity of investors with variable-rate loans
to make higher repayments, as they tend not to make excess mortgage
payments (and other forms of saving are less visible in available
data).
Most
borrowers with fixed-rate loans are also likely to be able to handle
the increases in their repayments when their fixed-rate terms expire.
Many
borrowers have taken advantage of very low interest rates on
fixed-rate products in recent years; in late 2021, almost 40 per cent of outstanding
housing lending had fixed interest rates – roughly double the share
at the start of 2020. Around three-quarters of currently outstanding
fixed-rate loans will expire by the end of 2023……
Read
the full analysis here.
