A “substantial increase” in mortgage hardship applications over the past year is prompting a call for continued vigilance on the potential risks to the Australian economy, according to the Council of Financial Regulators.
The regulatory body, comprising the Reserve Bank, Treasury, banking regulator and market regulator, expressed concern over the growing share of households falling behind on loan payments, anticipating a further rise in the coming period.
In its quarterly statement released on Monday, the council reported a notable acceleration in loan arrears in January, marking the fastest pace in at least two years from historically low levels.
The council underscored the need for close monitoring, stating, "Risks to the Australian financial system from lending to households warrant ongoing close attention but remain contained."
It identified that the broader financial stability hinged on factors such as the outlook for inflation and unemployment, and emphasised that risks could escalate if inflation persisted at higher levels than expected or if labour market conditions deteriorated further.
Despite a competitive lending environment, the council affirmed that bank lending standards remained sound. However, the recent surge in below-the-line discounting has rekindled concerns. Major banks have increased provisions for bad loans, reflecting a proactive approach to potential challenges.
The council cautioned that the final phase of the tightening cycle could prove challenging, particularly as savings deplete, unemployment rises and interest rates climb.
Additionally, the statement acknowledged challenging conditions in commercial real estate but reassured that risks were contained due to banks' low exposures and conservative lending practices.
As stress in overseas commercial real estate poses a potential threat, the council emphasised the need for ongoing monitoring, given the concentration of foreign ownership in the local sector.
Lastly, collaboration between the government and industry was stressed to ensure sustainable cash distribution arrangements in Australia, echoing the concerns raised by major distributor Armaguard about the need for additional funding to stay afloat.