There’s been another warning from the RBA…
Despite interest rates sitting at record low levels, one-third of Australian borrowers have not built up a repayment buffer, or are less than one month ahead on their home loan repayments, leaving them very exposed to an economic downturn or rise in interest rates according to the RBA.
In its latest Financial Stability Review, the Reserve Bank warned how vulnerable many Australian families are with their mortgage repayments.
Although “aggregate mortgage buffers – balances in offset accounts and redraw facilities – are high, at around 17 per cent of outstanding loan balances or around two-and-a-half years of scheduled repayments at current rates”, the concern is that “those with minimal buffers tend to have newer mortgages, or to be lower-income or lower-wealth households.”
Suggesting that they would be the most susceptible to a rise in interest rates or a job loss.
“Vulnerabilities related to household debt and the housing market more generally have increased, though the nature of the risks differs across the country,” it noted in the report.
“Household indebtedness has continued to rise and some riskier types of borrowing, such as interest-only lending, remain prevalent.”
“Investor activity and housing price growth have picked up strongly in Sydney and Melbourne.”
Debt has increased substantially as people have been forced to pay ever greater amounts for property in most of the major east coast markets, while income growth remains “weak”.
“Rising indebtedness can make households more vulnerable to potential income declines and higher interest rates,” observed the bank, which is bad news for the economy because “a highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply.”
In other words, if house prices fall, then households are likely rein in other spending, potentially stalling the economy.
However, the bank added that most people are currently coping with their repayments.
“Indicators of household financial stress currently remain contained and low interest rates are supporting household’s ability to service their debt and build repayment buffers,” the RBA soothed.
Check out this interactive graph from the ABC to see what’s happened to property prices over time:
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