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Despite Australia's rapid housing downturn, which threatens to be the worst in decades, the Reserve Bank believes the main threats to the nation's financial stability come from overseas.
Michele Bullock's comments to the media on Tuesday were interpreted as lowering the chances of a follow-up rate hike in November. Despite Australia's rapid housing downturn, which threatens to be the worst in decades, the Reserve Bank believes the main threats to the nation's financial stability come from overseas.
That is the key takeaway from its latest half-yearly Financial Stability Review , released two days after the bank increased its cash rate to a 15-year high of 4.6 per cent on Tuesday. While Australian households remain among the world's most indebted, a rise in real household disposable income per capita since a recent low point in 2023 and 2024 means most borrowers are better placed to cope with their mortgage repayments, even though rates have passed the peak of 4.35 per cent in that period.
As at the end of June, the RBA estimated that less than 2 per cent of variable-rate owner-occupier mortgage borrowers had a "cash flow shortfall" — that is, where their income was insufficient to cover scheduled mortgage repayments and essential expenses. The RBA forecast that this might rise to 2 per cent, or slightly above, in coming months as the cash rate has risen once since then to 4.6 per cent and is expected by financial markets to potentially rise further.
However, this is well below peaks close to 5 per cent in 2023 and 2024 during the post-COVID inflation spike, when the cash rate rose rapidly to 4.35 per cent. The bank also noted that the median, or middle of the range, borrower has offset and/or redraw buffers that would cover more than a year of scheduled mortgage repayments at current interest rates.
Even if borrowers find themselves unable to make their mortgage repayments, the bank said most would be able to sell their home in order to pay off their loan in full. It estimated that less than 1 per cent of borrowers were in negative equity and owing more on their loan than the market value of their home.
The RBA noted that even a 20 per cent plunge in house prices would only see around 5 per cent of mortgages falling into negative equity, due to the substantial run-up in property values ahead of the latest downturn. The central bank's modelling of a "very adverse downturn" — where unemployment increases to 6.3 per cent , inflation nearly doubles to 7 per cent and the cash rate climbs a further percentage point to 5.6 per cent — would still see just 5 per cent of mortgage borrowers "at a higher risk of defaulting on their loans", similar to levels seen in 2023.
While the Reserve Bank is relatively relaxed about the domestic situation, it warned ominously that "threats to international financial stability continue to mount". It cautioned that the interaction of intractable global conflicts disrupting key supply chains, the pace of technological development and the disruptions it causes, and the increase of severe weather events due to climate change, are key threats which "could be making a system-wide shock more likely and its potential consequences more severe".
Reflecting recent comments from the RBA governor and other senior officials, the bank warned that a bursting of the potential AI bubble could trigger broader financial fallout.
"Low risk premia in major equity and credit markets have contributed to buoyant financial conditions for businesses, but these risk premia could move sharply higher in response to an adverse shock potentially in a disorderly manner," the review noted. "One possible trigger could be a shift in sentiment towards the AI investment boom, which is increasingly fuelled by expectations of sustained rapid earnings growth and a debt-financing cycle that is becoming more opaque and circular.
" While the RBA noted that hyperscalers and hardware producers were generally viewed as lower risk due to alternative revenue streams and generally solid financial positions, there are "pockets of higher risk firms in the AI value chain", including data centre construction, utility and neocloud providers. It also noted the rising risks even for the large hyperscalers and hardware producers at the centre of the AI boom.
"The AI industry has been increasingly using off-balance sheet arrangements to finance large projects, such as data centres," the FSR observed. These "opaque" arrangements sit outside of the hyperscalers' balance sheets for now, but the RBA warned "their financial obligations to these projects are becoming significant, with estimates ranging from $US1 trillion to $US1.5 trillion", or $1.4 trillion to $2 trillion.
The RBA also highlighted concerns about "circular financing" within the AI sector, for example where chipmakers provided financial support to neocloud firms who then purchased their products. While there are financial risks posed by a collapse of the AI boom, the RBA also noted increasing risks if that boom continued. A key concern is increasing vulnerabilities to AI-driven cyber attacks, especially the reliance of financial institutions on a small number of critical technology service providers.
In addition, it warned of financial market risks around "herd behaviour and market correlation" as AI agents played a greater role in investment decisions. Another key global risk that is concerning the Reserve Bank is the recent jump in key advanced economy government bond yields, including the increased participation of investors, such as hedge funds, loading up on debt to play the market.
The RBA noted that hedge fund "repo" debt was near record highs, at more than $US3 trillion for US hedge funds alone, which was equivalent to about 10 per cent of that nation's annual GDP.
"This raises the prospect of increased volatility — and potentially a disruptive sell-off — in core bond markets that are central to the operation of the global financial system," the bank warned in the FSR.
FSR RBA Reserve Bank Of Australia Interest Rates Mortgage Borrower Home Loan Arrears Debt Bonds AI Artificial Intelligence Data Centres Private Credit
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