Australia at risk from major global financial shock, Reserve Bank warns

The Reserve Bank says households are well placed to weather the twin storm of rising interest rates and plunging property prices, but warned that Australia would not be immune to a sudden collapse of the global AI investment boom.

The central bank’s latest financial stability review – a biannual assessment of the financial system – said the “threats to global financial stability continue to mount”.

The warning comes as Reserve Bank estimated that fewer than one in 100 borrowers owe more on their home than it’s worth, despite this year’s broadening price falls.

“While some households continue to experience hardship, the estimated share of mortgagors in severe financial stress or in arrears has, so far, remained low, supported by the strong labour market and mortgagors’ savings and equity buffers,” the report said.

The RBA’s estimate that fewer than 1% of borrowers were in “negative equity” came with the caveat: recent buyers who took out loans worth close to the value of the property were more likely to now be in the position where the mortgage was higher than their home’s market value.

This included those who took advantage of the government’s 5% home guarantee scheme, the RBA said, although evidence suggested that the share of these borrowers falling behind on their payments remained “contained”.

The RBA estimated that even a 20% property price crash would only push about 5% of mortgages into negative equity – a testament to the fact most homeowners have enjoyed significant value gains over the years.

“Negative equity is insufficient to trigger default if borrowers remain able to service their loans, which remains the case for the vast majority of these households,” the report said.

The RBA said that a loss of faith in the artificial intelligence boom could trigger “disorderly asset price corrections” and that “Australia is unlikely to be immune” from the impact.

Alongside the huge sums being invested in artificial intelligence, two ongoing conflicts – in the Middle East and Ukraine – alongside “intensifying strategic competition among major powers” underscored these threats, the RBA said.

High valuations in global corporate debt and share markets meant they were vulnerable to a “disorderly” correction.

“One possible trigger could be a shift in sentiment towards the AI investment boom, which is increasingly fuelled by expectations of sustained rapid earnings growth and a debt-financing cycle that is becoming more opaque and circular,” the report said.

The RBA also warned of the rising risk of cyber-attacks, potentially facilitated by AI, and a sudden sell-off in global bond markets.

“These external factors are the most prominent threats to financial stability in Australia.”