Nothing To Rock The Boat From Bullock

RBA Deputy Governor Bullock concludes her address by noting that "in the title of this speech I posed the question ‘How are households placed for interest rate increases?’ There are a number of ways to come at this question – aggregate data, disaggregated data and scenarios. On balance, though, I would conclude that as a whole households are in a fairly good position. The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent and have built in larger buffers for interest rate increases. Much of the debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required. Furthermore, those on very low fixed-rate loans have some time to prepare themselves for higher interest rates."

• "While in aggregate it seems unlikely that there will be substantial financial stability risks arising from the household sector, risks are a little elevated. Some households will find interest rate rises impacting their debt servicing burden and cash flow. While the current strong growth in employment means that people will have jobs to service their mortgages, the way the risks play out will be influenced by the future path of employment growth. This, along with the Board's assessment of the outlook for inflation, will be important considerations in deciding the size and timing of future interest rate increases."
• Elsewhere, she noted that "while housing prices have started falling in recent months, they would have to fall a fair way for negative equity to become a systemic concern. Scenario analysis based on loan-level data suggests that a decline in housing prices of 10 per cent would raise the share of balances in negative equity to 0.4 per cent, which is still much lower than its peak of 3¼ per cent in 2019. Even a fall of 20 per cent in housing prices would only increase the share of balances in negative equity to 2.5 per cent. This low incidence of negative equity reduces the likelihood that borrowers will enter into default, as well as the size of losses incurred by lenders if they did."
• Q&A to follow.