Financial Stability Review – April 20252. Resilience of Australian Households and Businesses

2.1 Households

Pressures on Australian households’ budgets remain widespread …

Many households continue to experience pressure on their cashflows. Real disposable income per capita – that is, income after tax and interest payments and adjusted for inflation – declined notably over 2022 and 2023 as inflation picked up and interest rates and tax payable increased (Graph 2.1).¹ More recently, real disposable incomes have stabilised at around pre-pandemic levels, supported by Stage 3 tax cuts and easing inflation. Meanwhile, restrictive monetary policy continues to put pressure on mortgagors’ budgets, with debt-servicing payments expected to remain high as a share of household income even following the 25 basis point reduction in the cash rate at the February Board meeting. Information from the RBA’s liaison program suggests that community service organisations continue to report strong demand for assistance, as they did throughout 2024.² Inquiries to services such as the National Debt Helpline have also increased significantly since 2022, though this trend appears to have stabilised towards late 2024.³

… though the share of borrowers in severe financial stress has remained contained.

Despite widespread pressures on households’ budgets, most borrowers have enough income to cover their essential expenses and scheduled mortgage repayments. Around 3 per cent of borrowers are currently estimated to be experiencing a ‘cash flow shortfall’, putting them at risk of falling behind on their loan repayments (Graph 2.2). Although this percentage is higher than before the pandemic, it is notably lower than the peak observed prior to the Stage 3 tax cuts and a further moderation in inflation over the second half of 2024.⁴ The share of borrowers at greater risk of falling behind on their loan – those estimated to have both a cash flow shortfall and low buffers – has decreased to around 1 per cent of all variable-rate owner-occupier borrowers. Additionally, the share of loans in formal hardship arrangements has stabilised, although it remains a little higher than pre-pandemic levels.

The share of mortgagors that has fallen behind on their loan repayments due to the challenging environment remains limited, and the vast majority of borrowers continue to service their loans on schedule. Overall, the share of households experiencing severe financial stress remains very low across all regions (see Box: Household financial stress across the regions). In fact, the share of loans more than three months in arrears has stabilised at around pre-pandemic levels, and the incidence of household insolvency remains below those levels. Banks expect the share of loans in arrears to peak this year based on the current economic outlook (see Chapter 3: Resilience of the Australian Financial System).

Favourable conditions in the labour market have helped to contain loan arrears at low levels. Low unemployment – and, in turn, the ability of workers to retain or find more work (including extra hours) and obtain wage increases – has supported households’ incomes and their ability to service their debts. While the labour market has softened slightly since late 2022, the employment rate in Australia remains near record highs.

Loan arrears rates remain highest among highly leveraged and lower income households, though these rates have edged lower in recent months. Highly leveraged borrowers – with high loan-to-valuation (LVR) or high loan-to-income (LTI) ratios – are significantly more likely to fall into arrears, and a higher share of these borrowers are currently in arrears compared with the pre-pandemic period. However, arrears rates for these groups appear to have stabilised in the second half of 2024 (Graph 2.3). Lower income borrowers, who typically have smaller prepayment buffers, have also been more likely than the average borrower to fall behind on their mortgage payments. However, these borrowers’ arrears rates have declined over the second half of 2024 (Graph 2.4).

Despite a challenging period, most households have remained resilient and financial stability risks originating from households remain contained.

Most mortgagors have maintained large liquidity and equity buffers. Not only do these buffers help individual households withstand pressures on their cash flows, they also prevent stress from transmitting to the banking system via loan losses in most plausible adverse circumstances. Although the share of households consistently drawing on their cash buffers has declined relative to 2023, it remains a bit above pre-pandemic levels. That said, all but the highest income quartile have larger prepayment buffers than before 2020 (Graph 2.5). Additionally, mortgagors’ equity positions are generally strong, with less than 1 per cent of households currently in negative equity – a meaningful improvement from pre-pandemic levels (Graph 2.6).⁵

As a result, the vast majority of borrowers would remain able to service their debt under a range of plausible economic scenarios. Large liquidity and equity buffers would enable most households to navigate a period of higher-than-expected inflation and interest rates⁶ or a significant deterioration in the labour market.⁷ Even when faced with a severe 30 per cent decline in housing prices, around 9 in 10 mortgagors would still have positive equity. These borrowers could sell their home – albeit a disruptive and last resort solution – for at least the outstanding balance of their loan if faced with severe stress.⁸

Pressure on existing mortgage holders is expected to ease further over the coming year according to the projections in the February Statement on Monetary Policy.

Higher incomes and lower interest rates are expected to support borrowers’ cash flows. According to the RBA’s central forecasts reported in the February Statement (which were based on a declining cash rate path in line with market expectations at that time), real wages are projected to increase over coming years, while the unemployment rate is anticipated to increase only marginally before stabilising.¹¹ While the future path for interest rates and the projections more generally are highly uncertain, this outlook would imply a further easing in households’ budget pressures and a further decline in the share of mortgagors with negative cashflows (Graph 2.10).

Regulators, including the RBA, will closely monitor potential housing-related vulnerabilities that could emerge over time from any actual or anticipated easing of financial conditions.

In the longer term, vulnerabilities could build if an easing in financial conditions encourages households to take on excessive debt. While current lending standards are robust, historical experience both in Australia and abroad suggests that periods of low and/or falling interest rates can coincide with riskier borrowing activity and, at times, a relaxation of lending standards and rapid increases in housing prices. The pandemic easing cycle witnessed a sharp increase in the share of borrowers taking on large debts relative to their income, and the easing cycle that began in 2011 saw an increase in interest-only lending before APRA’s loan limit was introduced (Graph 2.11).

APRA’s prudential framework, and macroprudential settings, play an important role in reinforcing resilience. For instance, APRA’s capital standards incorporate higher risk-weights for investor and interest-only lending, which contribute to containing the associated risks. Additionally, APRA’s serviceability buffer ensures that banks make prudent lending decisions and extend credit to borrowers that are more likely to be able to repay their loans even if they experience an unforeseen fall in income or a rise in expenses.¹⁴ The Council of Financial Regulators, the main coordinating body for Australia’s financial regulators, will be closely monitoring how household vulnerabilities evolve in response to any actual or anticipated easing of financial conditions.

2.2 Businesses

Conditions remain challenging for a range of Australian businesses, particularly smaller enterprises, which has contributed to an increase in business insolvencies.

Subdued growth in economic activity and elevated input cost pressures have made conditions challenging for many businesses. Reflecting the challenging trading environment, the number of companies entering insolvency has risen sharply but remains small as a share of businesses. Around 0.5 per cent of businesses entered insolvency during 2024 – a rate that is at the top of the range observed in the 2010s (Graph 2.13). On a cumulative basis, company insolvencies remain slightly below their pre-pandemic trend, following a period of exceptionally low levels during the pandemic. The increase reflects challenging trading conditions and the removal of significant support measures introduced during the pandemic, including the Australian Taxation Office (ATO) resuming enforcement actions on unpaid taxes.

The increase in the number of insolvencies has been driven by small construction and hospitality businesses. This reflects ongoing challenges in these sectors. Insolvencies are also elevated in manufacturing as a share of businesses operating in that industry; however, given the industry’s small size this has not contributed materially to the overall rise (Graph 2.14). Meanwhile, insolvencies in other industries have also increased, although this has generally only taken them back to more typical historical levels as a share of operating businesses.

Financial stability risks stemming from the recent increase in insolvencies remain contained. This outcome reflects that businesses entering insolvency are typically small and carry little debt, resulting in banks having little exposure to them. The indirect effects of insolvencies on financial stability, for example through job losses at insolvent companies, have been limited by the small size of these companies and the strength of the labour market helping most affected employees to quickly secure new employment. The drivers of recent insolvencies and impact on the financial system are discussed in more detail in 4.3 Focus Topic: The Recent Increase in Company Insolvencies and its Implications for Financial Stability.

Nevertheless, most businesses continue to be profitable and resilient to shocks.

Most businesses remain profitable, despite the ongoing pressures (Graph 2.15). Most large and small businesses’ profit margins are around the level recorded over the 2010s, although our measure for small businesses is only available to the September quarter 2024 and surveys suggest that these businesses have faced increased pressure on their profitability since then. Additional measures – such as the share of businesses experiencing growth in profits or conversely making losses over the past year – are also around the average of the 2010s. Liaison indicates that many businesses have faced challenges in passing on higher input costs and they have implemented cost cutting measures to remain profitable. Many have achieved sufficient revenue growth to offset increased labour and non-labour costs over the past year or so – excluding interest payments, which are discussed below. Experiences do vary across businesses, with a sizeable number of particularly smaller businesses making losses, although this is not unusual.

Borrowing costs have declined a little, alongside the reduction in the cash rate announced at the February Board meeting, although remain high relative to the post global financial crisis average. Outstanding interest rates on loans to businesses and effective interest rates for listed companies – covering all their sources of debt – were little changed over the second half of last year. More recently, interest rates on loans have declined a little. While interest expenses remain at a relatively high level, liaison suggests this is less of a concern for businesses’ cash flows than other cost pressures.

Lenders’ ongoing appetite to lend to businesses has also reduced refinancing risk. Heightened competition for business loans over the past year has further supported some businesses’ access to finance; and conditions in corporate bond markets, including offshore, also remain favourable.¹⁵

Most businesses have maintained robust balance sheets, providing an important source of resilience. Businesses’ ongoing profitability has allowed them to avoid depleting their cash holdings or taking on additional debt to manage cash flow pressures. Latest available data suggest that most businesses hold cash buffers – which measure holdings of cash relative to expenses – above the average of the 2010s, although our measure for small businesses is only to mid-2022 and buffers have likely declined since then (Graph 2.16).¹⁶ Although these buffers have declined from their pandemic peaks, the decline has been driven more by the increase in expenses than draw down of cash balances. Similarly, overall leverage remains near historical lows in aggregate, and most indebted larger, listed companies’ leverage is comparable with their 2010s average (Graph 2.17). This is despite growth in business debt being well above its historical average.¹⁷ However, these metrics might overstate the degree of resilience, particularly among smaller businesses, since outstanding debts to the ATO remain elevated relative to pre-pandemic levels (see 4.3 Focus Topic: The Recent Increase in Company Insolvencies and its Implications for Financial Stability). Conditions also vary by industry, with small businesses in hospitality and retail typically holding smaller cash buffers.¹⁸

Early indicators of financial stress have stabilised or improved and pressures on businesses’ cash flows are expected to ease under the RBA’s central forecasts from February …

Early indicators of financial stress have stabilised or improved, according to the latest available data. More specifically:

• The share of businesses with severely overdue trade credit declined over the second half of last year, to be around its historical average level (Graph 2.18, top left panel). This trend is especially significant for small businesses, for whom trade credit is a crucial source of funding, and a mechanism via which financial stress can spread between businesses. There was a particularly sharp fall among hospitality businesses; however, this follows a large increase over the 12 months prior and the share of firms with severely overdue trade credit remains above its pre-pandemic average.
• The share of firms making operating losses declined, after increasing during the pandemic, and is around average levels (Graph 2.18, bottom left panel). While an operating loss does not necessarily signal financial stress, it means the firms must draw down on cash holdings or take other actions – such as increasing debt, liquidating assets, or securing an equity injection – to cover shortfalls. The incidence of losses is higher in some industries, such as retail. It is also higher among small businesses, with nearly 20 per cent reported operating losses in the June quarter, which aligns with the pre-pandemic five-year average.¹⁹ Furthermore, around half of those businesses with low operating profit margins have experienced this for the past year, although again this is around its pre-pandemic average.
• Larger companies’ debt servicing capacity has increased a little. Among larger listed companies, interest coverage ratios (ICRs) – which measure earnings relative to interest expenses – have generally improved slightly. The share with an ICR less than two – the threshold indicative of weaker debt servicing capacity and historically associated with an increased risk of insolvency – is little changed (Graph 2.18, top right panel).

Cash flow pressures are expected to ease for many businesses. Borrowing costs are expected to decline, as noted above, and the RBA’s central forecasts from February, based on the market-implied cash rate path at the time, suggest a recovery in demand growth and further easing in labour cost growth. However, RBA liaison suggests that firms expect non-labour cost growth to remain elevated over the coming year and many companies – especially those exposed to consumer discretionary spending – remain cautious due to uncertainty surrounding the outlook. Although it will take time for this easing in cash flow pressures to translate into a lower level of insolvencies (see 4.3 Focus Topic: The Recent Increase in Company Insolvencies and its Implications for Financial Stability), banks do not expect their business non-performing loans (NPLs) to increase materially.

… although the outlook is highly uncertain, including owing to international policy uncertainty and geopolitical tensions.

If downside risks to the global economic outlook materialise, they could spill over to some Australian businesses via trade linkages or tighter access to offshore funding markets (see Chapter 1: The Global Macro-financial Environment for more detail, including broader effects of this scenario). Some export-intensive businesses would be especially exposed to an intensification of global trade tensions, particularly to the extent that it leads to weaker growth in Australia’s trading partners. Most export-intensive firms (excluding mining) are small wholesale or manufacturing firms and account for a very small share of total liabilities and direct employment. Wholesalers are generally more leveraged than other firms, but they typically have greater agility to scale their operations in response to falling sales compared with manufacturers.²⁰ Additionally, the impact on broader risks to the financial system is limited by banks’ relatively small exposures to these firms.

Generally strong business balance sheets would limit the risk of widespread financial stress in most plausible adverse scenarios. Most larger listed companies are likely to be able to service their debts even if their earnings were to decline for a period or if interest rates rise or remain at their current level for longer.²¹ Consistent with this, market pricing of default risk among larger companies remains relatively low, although has increased. Smaller businesses are typically more vulnerable to adverse economic outcomes, as they tend to have higher year-to-year earnings volatility.²²

An actual or anticipated easing in financial conditions does not appear likely to contribute to a material build-up of vulnerabilities in the business sector given the current outlook.

Business leverage is at historically low levels and on balance, is not expected to pick-up notably in response to any actual or anticipated easing in financial conditions. This assessment is based on several key factors:

• Outlook for demand: Changes in business leverage tend to be more influenced by demand for businesses’ output than the cost and availability of debt funding. While aggregate private demand growth is forecast to recover over the coming year, it does so from subdued levels and only recovers to around its historical trend rate over the forecast period.
• Historical trends: Consistent with demand typically driving leverage, business leverage has tended to decline during previous monetary policy easing cycles in Australia as these periods are more likely to be associated with a weaker economic environment.
• High cash buffers: Businesses continue to hold large cash buffers, providing a cheaper alternative to fund expansion than taking on external finance such as debt.
• Low interest coverage ratios: ICRs remain low, which is associated with lower use of debt.

However, the RBA and other regulators will continue to closely monitor for any build-up of vulnerabilities, at both the aggregate level and at a more granular level. Monitoring will extend beyond regulated entities like banks to include business credit supplied by non-bank financial institutions (NBFIs), where transparency is more limited (see Chapter 3: Resilience of the Australian Financial System for more detail on risks stemming from NBFIs).

2.3 Commercial real estate

CRE market fundamentals are generally improving, and there is little evidence of financial stress among owners of Australian CRE.

Fundamentals have improved and valuations stabilised in most CRE markets, although conditions remain uneven across sectors and locations. One exception is among lower grade office properties, where leasing demand remains weak and valuations have likely not reached their bottom.²³ Additionally, there are some locations in Australia where office vacancy rates are particularly high, such as parts of Melbourne.

There continues to be little evidence of financial stress among owners of Australian CRE. Specifically:

• A-REITs maintain strong financial positions (Graph 2.19). Earnings remain robust, and leverage has stabilised at modest levels reflecting that for many A-REITs the pace of asset write-downs has slowed.
• The share of non-performing CRE loans at banks has increased slightly but remains low by historical standards (Graph 2.20). While there is an elevated number of borrowers on watchlists, liaison with banks suggests that borrowers are moving both on and off these watchlists, with banks remaining willing to work with those who can demonstrate a path back to meeting minimum requirements.
• Latest available data suggests that leverage remains low, and liquidity pressures have likely eased for many unlisted trusts. While a small tail of highly leveraged funds is more vulnerable to a decline in valuations, these funds are generally small and hold very little debt relative to the overall market, limiting the potential spillovers to the broader CRE market.
• Liaison suggests that loan quality remains sound among non-bank lenders. However, visibility is limited, particularly among lenders with significant exposures to lower quality assets or borrowers.

Strong appetite for lending to Australian CRE is supporting borrowers’ access to credit; however, if this trend leads to a deterioration in lending standards, it could ultimately undermine the resilience of the market.

Many banks now have an increased appetite for CRE lending, intensifying competition with non-bank lenders, which could lead to a deterioration in lending standards. Liaison suggests that banks, particularly larger banks, are eager to expand their CRE portfolio – especially in residential development – which has led some to adjust loan terms, such as lowering presale requirements, albeit while simultaneously reducing LVRs. Although this heightened competition supports borrower cash flows and credit availability, it also increases the risk that credit may be extended to riskier borrowers, potentially building vulnerabilities over time.

However, banks continue to have small exposures to CRE and conservative lending practices, while systemic risks from non-bank lenders are also limited (see Chapter 3: Resilience of the Australian Financial System). CRE loans represent around 6 per cent of total assets for the major banks, and the quality of these loans remain sound despite some adjustment in terms. By contrast, there is less transparency regarding non-bank lending, where lending standards are typically weaker as these institutions tend to have a higher risk tolerance and service a different segment of the CRE market. While currently non-bank lenders play a small role in the CRE market, they are an important source of credit for some borrowers and their role is widely expected to grow. In the event of losses, these would be passed onto investors, potentially causing funding challenges if investors reallocate their capital, although systemic risks from NBFIs remain contained (see Chapter 3: Resilience of the Australian Financial System).

Conditions in global CRE markets have stabilised and offshore interest in Australian CRE remains strong (see Chapter 1: The Global Macro-financial Environment). Foreign ownership of established CRE has increased on net over the past year (Graph 2.21, right panel) and liaison suggests that foreign interest via trusts has also picked up. Foreign banks continue to lend to owners of Australian CRE; although their exposures have grown more slowly recently, they still account for over 20 per cent of CRE-related bank lending (Graph 2.21, left panel). Listed Australian real estate investment trusts’ (A-REITs) access to offshore funding has not unduly tightened. Overall, these factors suggest that the risk of recent overseas CRE markets stress affecting Australia through interconnected funding and ownership sources has eased.

Endnotes

For a discussion on the drivers of real disposable income growth over the past five years, see RBA (2025), ‘Box B: Consumption and Income Since the Pandemic’, Statement on Monetary Policy, February. 1

For more detail, see RBA (2025), ‘Box D: Insights from Liaison’, Statement on Monetary Policy, February. 2

Experiences vary significantly across different household types. Renters are generally more likely to experience financial stress than homeowners as their essential expenses are a larger share of their disposable income and they tend to have lower savings buffers; while this pattern was evident pre-pandemic, renters’ increase in stress has also been most pronounced relative to before the pandemic. 3

In the Securitisation System, incomes are only observed when the loan is originated. To estimate current income, origination income is grown forward using the Wage Price Index. Since the September 2024 Financial Stability Review, the methodology for calculating household spare cash flows has been improved. We now use the Melbourne Institute’s Household Expenditure Measure according to Greater Capital City Statistical Areas (GCCSAs), which allows essential expenses to vary across different geographic areas. 4

This estimate is based on the share of mortgagors or loans in negative equity, net of offset and redraw account balances. Banks typically report the share of loan balances in negative equity; estimates of negative equity on this basis are larger than the share of loans by number. 5

See RBA (2024), Financial Stability Review, March. 6

See RBA (2024), Financial Stability Review, September. 7

Based on the share of loans in negative equity, net of redraw and offset balances estimates using the Securitisation System. This is likely to be an underestimate given high-LVR loans are under-represented in the dataset. See Hughes A (2024), ‘How the RBA Uses the Securitisation Dataset to Assess Financial Stability Risks from Mortgage Lending’, RBA Bulletin, July. 8

Based on Statistical Area Level 4 (SA4). In regional areas, SA4s tend to have smaller populations of 100,000 to 300,000 people. In cities, SA4s tend to have larger populations of 300,000 to 500,000 people. For more detail, see Australian Bureau of Statistics (2021), ‘Australian Statistical Geography Standard’, Edition 3, 20 July. 9

Having low or negative equity can affect a household’s ability or willingness to make the difficult decision to sell their property to fully pay off their loan when facing financial stress. Low or negative equity increases a mortgagor’s likelihood of both falling into arrears and transitioning from arrears into default, see Bergmann M (2020), ‘The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis’, RBA Research Discussion Paper No 2020-03. 10

As is the case with the RBA’s Statement on Monetary Policy, these forecasts are conditioned on a cash rate path derived from financial market pricing at the time of publication; they assume that the cash rate will begin declining in early 2025 and reach around 3.5 per cent by mid-2027. Projections are based on legislated personal income tax brackets at the time of the Statement on Monetary Policy publication. 11

While investors in Australia have lower historical arrears and default rates, this may not generalise to the experience of investors in a severe downturn. 12

Kearns, Major and Norman show that large declines in asset prices can lead to substantial declines in consumption and that the increase in indebtedness over the past decade have somewhat increased the potential loss of consumption during periods of financial stress. See Kearns J, M Major and D Norman (2020), ‘How Risky is Australian Household Debt?’, RBA Research Discussion Paper No 2020-05. 13

In addition to the serviceability buffer, the countercyclical capital buffer (CCyB) is also part of APRA’s macroprudential policy toolkit. The CCyB is an additional capital requirement to reinforce system-wide bank resilience that can be relaxed during stress and is currently set at 1 per cent of risk-weighted assets. 14

For more detail, see RBA (2025), Statement on Monetary Policy, February. 15

For more detail, see Bullo G, A Chinnery, S Roche, E Smith and P Wallis (2024), ‘Small Business Economic and Financial Conditions’, RBA Bulletin, October. 16

For more detail, see RBA, n 15. 17

For more detail, see Bullo et al, n 16. 18

For more detail, see Bullo et al, n 16. 19

For more detail, see RBA (2023), Financial Stability Review, April. 20

For more detail, see RBA (2024), ‘4.1 Focus Topic: Scenario Analysis of the Resilience of Mortgagors and Businesses to Higher Inflation and Interest Rates’, Financial Stability Review, March. 21

For more detail, see Bullo et al, n 16. 22

For more detail, see Lim J, M McCormick, S Roche and E Smith (2023), ‘Financial Stability Risks from Commercial Real Estate’, RBA Bulletin, September. 23