Australia on brink of financial ‘armageddon’

The Reserve Bank of Australia (RBA) revealed on Friday that mortgage pain has forced homeowners to work longer hours or take up second jobs, dip into their savings and shop around for higher paying roles as they struggle to keep a roof over their heads.

In the past two years, the cash rate has skyrocketed by 425 basis points from its historic pandemic low and it is now at its highest level since 2011, sitting at 4.35 per cent.

Aussies have been taking to Google for help in a worrying sign of them facing financial difficulties while demand for financial counselling and the National Debt Helpline has exploded.

The central bank’s head of financial stability, Andrea Brischetto, addressed these concerns in a speech on Friday night at the Sydney Banking and Financial Stability Conference.

Although she noted that fewer than two per cent of Australia’s borrowing population are facing “severe financial stress” within the next six months, she said across the board many Australians had taken drastic measures to round out their bank accounts.

According to Ms Brischetto, many Australian households have been forced to “adjust” to the “pressures” of an ultra high cash rate.

“Some households have managed to increase their hours of work or switch to a higher paying job,” she said.

“Many households have also had to make adjustments to their consumption.”

The RBA has found that “many borrowers are now devoting a considerably larger share of their income to servicing their debts than in early 2022 when interest rates were at their lowest”.

One in five homeowners — or 20 per cent of variable-rate owner-occupier borrowers — now use more than 30 per cent of their income to pay their household debt, which renders them in mortgage stress.

“Google searches of terms related to household financial stress have also trended up and financial counselling services such as the National Debt Helpline and other community organisations have seen increased demand for their services over the same period,” Ms Brischetto added.

Ms Brischetto also noted that both loan arrears and personal insolvencies have skyrocketed since Australians enjoyed the low cash rate in place during the Covid-19 pandemic.

It is imperative these levels remain manageable, according to the banking heavyweight, otherwise Australia could be facing a financial armageddon similar to that of the 2008 Global Financial Crisis.

“Housing loans make up nearly half of Australian banks’ exposures,” she warned.

“Therefore, if a sufficiently large number of mortgagors were to default on their loans, lenders could face widespread losses as a result.”

She went on to say that “if these losses were large enough”, this could disrupt the economy and lead to mass unemployment.

This, in turn, “would further increase financial stress among households and businesses, leading to further loan defaults, bank losses and pullback in the supply of credit”.

However, things aren’t all bad.

She noted that “financial stress among households does not automatically imply financial instability” and said the vast majority so far have been coping with the rate rises, albeit with adjustments to their work and spending.

Only two per cent of borrowers so far are in this danger zone of financial instability.

It comes as news.com.au earlier reported that secret briefings inside the Reserve Bank, obtained from freedom of information documents, revealed a startling surge in the number of middle-class Australians on six-figure salaries seeking a financial crisis support.

The National Debt Helpline – a resource offering those in need access to free financial counselling — has seen a “significant increase in hardship requests” over recent months, especially from Aussies running into strife for the very first time.

“The NDH is experiencing an increasing volume of calls from people who have not experienced financial hardship or drawn on social services previously,” the memo read.

“Many callers were gainfully employed. Examples were given of mortgagees on six figure salaries residing in prosperous suburbs of Sydney.”

— With Shannon Molloy