One in three mortgage borrowers has a repayment buffer of less than one month, placing them at increased risk of mortgage default if interest rates were to rise or wages fall, warned the Reserve Bank of Australia (RBA).

This grim financial reality was highlighted by the RBA in its April edition of the twice-yearly Financial Stability Review, which examines the Australian banking system and economy, as well as potential risks to financial stability. The lack of buffers at vulnerable households has left Aussie banks exposed to the risk of higher bad debts and lower earnings, warned the RBA.

Across the total mortgage market, borrowers were on average about 2.5 years ahead of their minimum repayment schedule. That figure, however, concealed the dire situation for many low-income and high-debt households. 

“These aggregate figures mask significant variation across borrowers, with available data suggesting that around one-third of borrowers have either no accrued buffer or a buffer of less than one month’s repayment,” the review said. 

The RBA noted that vulnerabilities related to household debt and the housing market have generally increased, though the nature of these risks differed across the states and territories. 

“Household indebtedness has continued to rise and in Sydney and Melbourne, investor activity and housing price growth have picked up strongly. In inner areas of Brisbane and some other locations, there are ongoing concerns about a future oversupply of apartments given the large volume of apartments still to be completed,” the review said. “In Western Australia and other regions exposed to the mining sector, economic conditions remain challenging and both detached house and apartment prices have fallen as income and population growth have slowed.”

Sally Auld, economist at JP Morgan, said the review indicated the Reserve Bank was increasingly concerned about the housing market. “The commentary around risks to the housing sector and household debt reflects higher levels of anxiety,” she said. “A highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply,” she said. 

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