Mortgage hardship jumps ‘materially’ as economic risk comes into focus, says Council of Financial Regulators

“Risks to household balance sheets, and in turn financial stability, would increase if inflation were to remain high for longer than anticipated or if labour market conditions deteriorate more than expected,” the statement said.

The jobless rate ticked up to 4.1 per cent in January, from 3.9 per cent in December.

The council said bank lending standards remained sound “despite the competitive lending environment”, which is heating up again with a rise in below-the-line discounting.

Banks increased their provisioning for bad loans, last month’s profit updates revealed.

National Australia Bank, for example, said credit impairment costs rose 17 per cent to $193 million in the December quarter. Westpac announced a $189 million impairment charge for the first quarter that was 47 per cent higher than the second half average.

Ninety-day arrears – the most at risk of default – rose 9 basis points to 0.95 per cent at Westpac in the December quarter. At NAB, the number was steady at 0.75 per cent of its home lending book.

“The last leg of this tightening cycle could prove to be the most challenging, as savings are depleted, unemployment rises, and higher interest rates continue,” S&P warned last month.

The council also said, despite the challenging conditions in commercial real estate, the risks were contained “due to banks’ low exposures, conservative lending practices and the relatively strong financial positions of … owners”.

Stress in overseas commercial real estate may, however, bleed into Australia because of the concentration of foreign ownership in the local sector, and the council said it would continue to monitor the situation.

It also stressed the importance that the government and industry to collaborate to “ensure the sustainable arrangements or cash distribution in Australia” as the only major distributor, Lindsay Fox’s Armaguard, warned it needs more funding to stay afloat.