Rising Mortgage Stress Threatens Australian Households despite Robust Economy

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As the Reserve Bank of Australia concludes its biannual deep dive into the nation’s financial ecosystem, the economic landscape appears generally robust. However, it emerged that an increasing population of Australians with mortgages now hover at the precipice of economic distress. Faced with the dilemma of rising interest rates that could potentially overshadow incomes and deplete savings, these homeowners are battling to keep their finances afloat.

Remarkably, 5 per cent of owner-occupied households now find their expenditures, covering essentials and mortgage repayments, exceeding their income. This precarious financial teeter-totter doesn’t necessarily imply mortgage stress, although, to maintain apparent normalcy, these borrowers might have to delve deeper into their savings, restructure loans or contemplate more affordable education and health insurance choices.

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Treasurer Jim Chalmers drew attention to the report as a significant prompt to the persistent dilemmas affecting both the global economy and the global financial system. The study revealed Australian households and businesses are generally weathering the storm due to the potent combination of a strong labour market and the safety net of their savings buffers.

However, ripples of concern permeate the study as a small but escalating fraction of borrowers now find themselves on the brink of financial strain. Already, an upturn in monthly inflation rates, currently sitting above the Reserve Bank’s target range of 2 to 3 per cent, looms over the financial state of the nation.

Only a little over two-thirds of owner-occupier borrowers reportedly have enough savings to tide them over for at least half a year, given the rates persist at the current level. This leaves one in three borrowers vulnerable to draining their savings within half a year, putting them at risk of defaulting on housing loan payments.

A silver lining existed in the form of a savings buffer that households had managed to amass, thanks to the pandemic. Nevertheless, the influx of new savings has dwindled, thereby limiting excess payments into offset accounts and redraw facilities.

In his statement, Dr Chalmers recognized the challenges that average Australians are coping with, particularly those transitioning from lower fixed-rate mortgages to higher operational interest rates.

Shifting focus to China, the review acknowledged the impact of China’s economic stress on the global economic outlook. Economic growth in China has decelerated, aggravated further by the pandemic and the significant decline in property market health. This financial tension could influence the global system, causing slower growth and increased risk aversion, with Australia potentially feeling its aftermath through slowed global economic activity, reduced Chinese imports and lesser global commodity rates.

Turning to businesses, the Residence Bank found most firms to show overall resilience, though existing cost pressures and reduced demand have begun squeezing some companies’ profitability and liquid reserves. Consequently, the number of company insolvencies has climbed to around pre-pandemic levels, ringing warning bells.

Despite these concerns, the review found that the broader Australian financial system remains at low risk, with banks well-prepared to continue supplying credit even if the economy takes a turn for the worst. Overall, the palpitations in the business sector appear to have limited direct risks on the banking industry, with systemic risks from financial establishments outside the banking sector remain low in Australia.

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Melinda Cochrane is a poet, teacher and fiction author. She is also the editor and publisher of The Inspired Heart, a collection of international writers. Melinda also runs a publishing company, Melinda Cochrane International books for aspiring writers, based out Montreal, Quebec. Her publication credits include: The art of poetic inquiry, (Backalong Books), a novella, Desperate Freedom, (Brian Wrixon Books Canada), and 2 collections of poetry; The Man Who Stole Father’s Boat, (Backalong Books), and She’s an Island Poet, Desperate Freedom was on the bestseller's list for one week, and The Man Who Stole Father’s Boat is one of hope and encouragement for all those living in the social welfare system. She’s been published in online magazines such as, (regular writer for) ‘Life as a Human’, and Shannon Grissom’s magazine.