RBA Bullock: Very Small Share of Households’ Mortgages in Negative Equity
- Published on
- 27 Oct 2020, 06:48 PM
By Sophia Rodrigues
Households’ non-performing mortgages are expected to continue rising over coming months but the impact on banks’ balance sheet from such loans will be limited because only a very small share of loans are currently in negative equity, Reserve Bank Assistant Governor Michele Bullock said Tuesday.
Bullock made the comments in an address to Ayr Chamber of Commerce online event. The topic of the speech was, “Financial Stability in Uncertain Times.”
Those losses could, however, increase if there is a substantial fall in housing prices, Bullock warned.
She noted that housing prices have so far held up as there is demand from owner-occupiers. But because of uncertain economy recovery and as population growth is forecast to remain weak, conditions in the housing market could weaken, at least in some cities.
“Price falls could be exacerbated by housing investors who, seeing vacancy rates rising and rents falling, decide to sell,” Bullock said.
The RBA will be watching problems for households in servicing their debt and rising business insolvencies over the next year to gauge its impact on financial stability.
Bullock said the Australian financial system currently remains profitable, and banks’ strong capital position allows them to continue to lend and support the Australian economy.
But over the coming year there will be pressure on banks’ profits and capital, depending on how the economy evolves.
Based on the RBA’s baseline scenario in the August Statement on Monetary Policy, capital ratios could decline to under 10% from over 11%, and to a bit over 9% in the downside scenario.
The likelihood of a major bank failing is very low because it would require an outcome even worse than 20% fall in GDP, 50% fall in property prices and unemployment rate rise to 20%.
“A downturn of this magnitude has not been observed since the Great Depression and even then, capital ratios remain about prudential minimums. This confirms that the likelihood of a major bank failing is very low,” Bullock said.
One area of particular concern for the RBA is commercial property due to rising vacancy rates and substantial new supply. This could lead to a rise in impairment rates for banks even though they do not have a large direct exposure to commercial property.
--Contact: Sophia@centralbankintel.com