The number of mortgage holders spending more than they earn has reached its lowest point since 2022, but the Reserve Bank of Australia (RBA) is cautioning banks to continue lending with care to shield the housing market from potential risks. According to RBA’s recent financial stability review, now only about one in 30 mortgage holders are overspending, compared to one in 20 owner-occupiers on variable-rate mortgages during mid-2024.

The RBA noted that the percentage of households falling behind on their mortgages has largely remained stable at pre-pandemic levels, with Victoria experiencing the greatest mortgage stress. The RBA also highlighted risks to Australia’s economic recovery, including weakened trade with China and the possibility of escalating household debt.

Despite these risks, the RBA is confident that Australian banks are equipped to handle any economic downturn. However, the banks are encouraged to exercise caution in lending practices to prevent households from accumulating excessive debt and to avoid investors from over-injecting borrowed funds into the real estate market.

Interest rate cuts could lead to inflated house prices if borrowing continues to rise, according to the RBA’s review. It credited “very sound” lending rules, including the serviceability buffer, for safeguarding the housing market during this period. The buffer might be reduced under a Coalition government if the opposition follows through with its proposal to ease rules as part of its efforts to make housing more affordable.

The report was released shortly after the US implemented 10% tariffs on all imports from Australia. The RBA indicated that further tariffs could have negative effects on the economy and could increase inflation. It also warned that trade policy changes could impact global growth and make borrowing more expensive.

Source: https://www.theguardian.com/australia-news/2025/apr/03/rba-urges-caution-on-lending-criteria-as-report-shows-borrowers-in-better-financial-shape-than-2022