Around 15 per cent of Australian households with mortgages will move into a negative cash flow position this year, according to the Reserve Bank’s baseline economic scenario.
Under scenario analysis detailed in the RBA’s latest Financial Stability Review, the baseline includes unemployment rising 25 basis points over 2023 to 3.75 per cent, the cash rate peaking at 3.75 (from its current level of 3.6 per cent) and incomes growing by 4.25 per cent.
The cash rate peak of 3.75 per cent in the scenario was chosen because it is in line with survey-based forecasts and market pricing at the time the article was prepared.
If that is how things play out, the RBA expects that 15 per cent of households with home loans will have mortgage payments and essential living expenses in excess of household disposable income by the end of the year.
The RBA also modelled an adverse scenario, which included the same cash rate assumption as for the baseline scenario, unemployment rising to 5.5 per cent, underemployment of 8 per cent and incomes growing by 3.5 per cent.
Under those conditions, the share of borrower households experiencing negative spare cash flow by the end of the year would rise to 17 per cent.
The RBA estimates that most households have sufficient savings buffers to finance their debt and living expenses. But under the baseline scenario, around 14 per cent would deplete their buffers by the middle of next year, assuming they are unable to make adjustments to essential spending and work hours, and they choose not to reduce non-essential spending.
Around 9 per cent would be at risk of using up their savings if they reduce their non-essential spending. Under the adverse scenario the proportion of borrower households in this category would rise to 10 per cent.
Lower income households, first home buyers and borrowers with high debt relative to income are the most at risk of having insufficient buffers if their cash flow turns negative.
The RBA conceded that the extent of financial stress could be larger than estimated but it also said there are several factors not included in the scenario analysis that could lower the risk of stress.
These include the likelihood that people would not remain unemployed or underemployed for long and the response of lenders (such as temporary mortgage holidays).