Around one in 20 households with variable rate home loans are suffering cash flow shortfalls as a result of higher interest rates and prices, the Reserve Bank says. But this is no worse than it was last year.
The RBA’s latest Financial Stability Review includes an estimate that 5 per cent of variable rate owner occupier mortgage borrowers have expenses that exceed income, forcing them to cut back on spending, draw down on savings, sell assets or work more hours.
The RBA said lower income borrowers were more likely to be in this group.
The most at-risk group - borrowers with a cash flow shortfall and low savings buffers - is around 2 per cent of variable rate owner occupier borrowers.
The RBA has been reporting this cash flow shortfall measure since April 2022, when the proportion of variable rate owner occupier borrowers whose expenses exceeded their income was 1 per cent. That number rose to 5 per cent in July last year and has remained at that level.
The RBA said it expects to see a decline in the share of borrowers with a cash flow shortfall start to decline towards the end of this year, due to moderating inflation, higher real wages and a decrease in the cash rate. It said the current level will fall by about half by the end of next year.
The factor that might upset this forecast is a rise in unemployment, although savings buffers and other household income would mitigate some of the impact. More than half of all home loan borrowers have enough savings to service their debts and essential expenses for at least six months.
Since the start of 2022, real disposable income (income after tax and interest payments and adjusted for inflation) has declined by around 7 per cent to be near its pre-pandemic level in per capita terms.
Most mortgage borrowers have experienced an increase in their minimum scheduled payments of 30 to 60 per cent since the first increase in the cash rate in May 2022.
Housing and personal loan arrears rose throughout 2023 but remain below their pre-pandemic peaks.
Loan arrears are low but they are higher among borrowers with high leverage, as these borrowers tend to have lower buffers. The overall arrears rate (90 days or more overdue) is less than 1 per cent, while the arrears rate for highly leveraged borrowers is less than 2 per cent.
The RBA said sound lending standards and an increase in house prices are supporting borrowers’ resilience. The share of new loans originated at high loan-to-valuation ratios is at historical lows and only around 1 per cent of loans are in negative equity.