The Reserve Bank of Australia has warned that business failures will rise “significantly” and highlight homes and business assets as key areas of its stress. Financial Stability Review.
The RBA says business failures will rise as debt repayment deferrals and income support end. The central bank warns that at least 10 per cent to 15 per cent of small businesses in severely affected industries.
“These businesses are in a bad position and are particularly vulnerable to further declines in trading conditions or the removal of support measures.”
The central bank says the number of families experiencing financial stress has increased and will “increase” as unemployment rises and many employees reduce working hours.
The repayment of 7% of home loans was deferred by the end of August 2020. This stock is down from the peak
8 percent in June, which reflects a recovery.
The RBA estimates that if prices fall further by 10 per cent, the share of all debt in negative equity will almost double, and for a 20 per cent decline, the share will increase sevenfold.
Rising rental vacuum rates were also highlighted as risk.
“Extended periods of vacancies can make it harder for mortgaged investors to repay and decide to sell their property.
The RBA also warned of the consequences for small business owners of using their homes as a network.
“A significant portion of small and medium business loans are secured by residential property, so the difficulties these businesses experience will lead to higher forced sales and downward pressure on home prices.”
Commercial real estate was flagged as posing a “significant risk” to lenders and foreign investors.
Prior to the outbreak, the Bank said structural change in the retail sector would contribute to the rise and fall of retail asset vacancy rates.
“This process has accelerated mobility controls and voluntary physical distance during epidemics. Before the crisis, conditions were tight in the office markets, especially in Sydney and Melbourne.”
The RBA says that the asset outlook for banks is that banks’ default rates will increase from their current low levels. The risks to retail property appear to be high.
The RBA said that banks have been better placed than they were in the 1990s and 2007/08 as prudent lending standards have been maintained over the past few years.
Banks’ direct disclosure of commercial assets as equity is only 6 percent, which is 2 percentage points lower than it was before GFC.
Some business loans are protected by commercial assets because the effective exposure of banks to commercial assets is slightly higher than this.
The assessment of Australia’s financial system came after the monthly board meeting on Tuesday, and after the November meeting, after opening the door to further monetary policy easing.
Leading economists expect the central bank to cut its monetary rate, three-year yield target and term fund ratio from 0.25 percent to 0.1 percent.
The bank noted in a statement on Tuesday that the “extra monetary easing” was more blatant than the “further monetary measures” used in the September report.
The reference to fighting high unemployment as an “important national priority” would be strong in considering the Bank’s high monetary policy easing.
The RBA said the Australian financial system had the highest level of liquidity and the lowest borrowing costs: $ 81 billion had been disbursed under the initial payment of the term financing facility.