The relaxed read on housing removes one argument against further tightening, which fits the RBA’s warning that it is prepared to raise rates again after Tuesday’s hike. The more market-relevant message is the central bank’s focus on offshore risks, with leveraged investors in bonds and AI equities named as amplifiers of volatility and high asset prices leaving global markets exposed to a disruptive pullback. That makes sentiment toward the AI investment boom a plausible channel through which global stress could reach Australian assets. The review is a stability assessment and not a rate decision, so it does not by itself change the policy outlook.
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Earlier:
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The RBA says falling house prices are not what threatens Australia’s financial stability, pointing instead to AI-driven markets, leverage and cyber risk abroad as the shocks to watch.
Summary:
- The RBA’s Financial Stability Review, released Thursday, says most households and businesses can handle a slower economy and falling house prices.
- Fewer than 1% of borrowers are in negative equity now, and about 2% of owner-occupiers face a cash flow shortfall, mostly with savings covering at least six months.
- A further 20% price fall would leave only about 5% of mortgages in negative equity, according to the RBA.
- In a harsher scenario of unemployment at 6.3%, inflation at 7% and the cash rate at 5.6%, the share at risk of defaulting rises to around 5%, slightly above the 2023 peak.
- Banks are highly capitalised and profitable, and lending standards remain sound, with riskier lending restrained.
- The RBA says major risks are coming from abroad, including AI funding that is increasingly opaque and circular, leveraged investors, cyber threats and a possible market crash.
The Reserve Bank of Australia said most Australian mortgage holders would keep positive equity even if house prices fell a further 20% and unemployment rose above 6%, according to its Financial Stability Review released on Thursday. The report followed the central bank’s fourth interest rate increase of the cycle on Tuesday, which lifted the cash rate to 4.6%, a 15-year high, with the RBA warning that it was prepared to hike again if needed.
The RBA said that while risks to the economic outlook had risen, most indebted households appeared well placed to cope with a wide range of adverse outcomes, helped by the earlier run-up in house prices and prudent lending standards. Fewer than 1% of borrowers are currently in negative equity, it said, and about 2% of owner-occupiers face a cash flow shortfall, with most of those holding savings that would cover at least six months of expenses. In the 20% price-fall scenario, the bank estimated that only about 5% of mortgages would be in negative equity. In a harsher scenario, with unemployment at 6.3% from 4.6% now, inflation at 7% and the cash rate at 5.6%, the share of mortgage holders at risk of defaulting would rise to around 5%, slightly above the 2023 peak.
Banks were described as highly capitalised and profitable, with sound lending practices that leave them well placed to weather a material deterioration in the housing market. The RBA noted pockets of stress among households and businesses but said loan arrears remain low. Cash flow pressures are expected to build for smaller and energy-intensive businesses, while most firms can manage elevated costs and some are passing them on to customers. Private credit has grown significantly in Australia but remains small and is not yet a threat to overall stability.
The housing backdrop is softening. Data from Cotality released on Thursday showed home prices fell for a sixth straight month in September and are more than 5% below their peak, while AMP economists forecast a drop of 10% to 15% this cycle, which would be the largest downturn in three decades.
The RBA said the main threats to financial stability are increasingly coming from abroad, including regional wars, cyber attacks, higher sovereign debt and a possible crash in financial markets. It singled out a shift in sentiment toward the AI investment boom as one possible trigger, citing funding that is becoming more opaque and circular and is exposed to profit disappointment. It added that rapid advances in frontier AI have made cyber threats more complex. The review suggests the central bank sees little need to hold back on policy because of housing, while treating AI-linked markets and cyber risk as the shocks to monitor.
This article was written by Eamonn Sheridan at investinglive.com.