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Monday, 9 March 2015

Rental/mortgage stress declines

Stress

The Reserve Bank released a paper detailing stress testing of Australian households today.

The survey measures were based on a broader set of households (including unindebted households) and they implied that the financial health of the household sector improved over the 2000s. 

A number of self-reported indicators of financial stress declined, such as the share of households unable to make a bill, rental or mortgage payment.

Notably, the financial crisis saw the share of households showing indicators of financial stress from rental or mortgage repayments increase only moderately - particularly when compared to, say, the United Kingdom or the US which saw horrific spikes in non-performing loans.

Over the past five years lower interest rates have seen these indicators falling away with financial stress indicators appearing set to hit their lowest level across the 15 years of data.


Conclusions

The results of the testing also showed that households with "negative financial margins" declined by from 12 percent to 8 percent between 2002 and 2010.

These households tended to have lower incomes, be younger and live in rental accommodation;, and therefore these groups also tend to hold a relatively low proportion of the total household debt.

Therefore lenders’ exposure to households with negative financial margins appears to have remained limited and any losses to be expected have remained fairly low.

Noted the paper:

"This suggests that aggregate measures of household indebtedness may be a misleading indicator of the household sector’s financial fragility".


The Reserve Bank's models ran "Monte Carlo" simulations of unemployment shocks and other adverse outcomes.

Upon application of shocks to the model, here was the conclusion:

"Although the stress-testing model used in this paper is relatively simple and relies on a number of assumptions, it generates plausible results in response to shocks to interest rates, the unemployment rate and asset prices. 

The results from the two stress scenarios considered – both of which incorporate a substantial increase in the unemployment rate and a substantial decline in asset prices – imply a high level of household financial resilience and limited expected loan losses for lenders."

In fact, expected loan losses are actually lower under the less severe of the two scenarios, which has rising unemployment and falling asset prices comparable to Australia’s experience during the financial crisis. 

This was due to the offsetting effect of lower interest rates, highlighting the potential for expansionary monetary policy to offset the effect of negative macroeconomic shocks on household loan losses.

Good news, and ties in with a number of indicators which show mortgage stress to be presently low, allowing households to build material mortgage buffers