Reserve Bank warns on mortgage repayment risks as interest rates eyed
The Bank says rising inflation and higher interest rates will make it difficult for some borrowers to meet repayments, as households brace for rate hikes.
The Reserve Bank has warned rising inflation and higher interest rates will make it difficult for some borrowers to meet their loan repayments, as highly indebted households brace themselves for a series of rate hikes expected after next month’s election.
In its semi-annual Financial Stability Review published on Friday, the central bank said that while systems are resilient, Russia’s invasion of Ukraine and rising global inflationary pressures would cause more market volatility and uncertainty.
“Falls in financial asset and property prices could be triggered by larger-than-expected increases in interest rates, rising risk aversion, dislocation in financial markets and/or weak income growth,” the review said.
“Many financial asset prices remain at high levels, notwithstanding some recent declines. The prices of most types of commercial and residential property are also elevated”.
The RBA also said the risk of cyber-attacks for banks and other financial institutions have increased after Russia’s assault on Ukraine and the central role of the financial system in the application of sanctions on the aggressor.
All things considered, the RBA concluded Australia’s financial system “has remained highly resilient and supportive of the economic recovery”.
“The banks remain very well capitalised, have high holdings of liquid assets and have ready access to wholesale funding,” the review said.
“Loan arrears rates are low and have declined a little recently. Businesses and household balance sheets are in generally good shape, with many households having built up substantial buffers on their mortgages.
“Even so, housing credit growth has for some time exceeded growth in incomes, with the ratio of housing credit to income edging up from an already high level.”
The stability review comes as economists at the major banks bring forward their calls on official interest rates, with the consensus now the RBA will lift its cash rate as soon as practicable after next month’s election.
On Tuesday RBA governor Philip Lowe revealed the central bank board is no longer “prepared to be patient”, marking a key change in rhetoric that economists say paves the way for a rate hike to 0.25 per cent in June.
In a statement accompanying the widely expected decision to hold rates at 0.1 per cent at this month’s board meeting, Dr Lowe said that “inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target”.
But the governor emphasised that the RBA was now on a watching brief for a rate rise, as it awaited key consumer price and wage growth figures to confirm the start of monetary policy normalisation.
Global inflationary pressures and bond market yield surges have prompted rises in fixed-term loans this year, with Westpac the unveiling a rate increases on Thursday.
The nation’s second-biggest home lender after Commonwealth Bank lifted rates by 30 basis points on owner-occupier loans for fixed terms of two, three, four and five years, with one-year loans adjusted by 25 basis points.
In the stability review the RBA said three-quarters of fixed-rate loans will expire by the end 2023.
Dr Lowe’s statement on Tuesday noted financial conditions in Australia continue to be highly “accommodative” and cautioned lenders and borrowers about undue risk.
“Interest rates remain at a very low level, although fixed mortgage rates for new loans have risen recently,” he said.
“The Australian dollar exchange rate has appreciated due to the higher commodity prices and, in (Trade Weighted Index) terms, is around the level of a year ago.
“Housing prices have risen strongly over the past year, although some housing markets have eased recently.
“With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers”.
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