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

2.1 Households

Budget pressures on Australian households have been gradually easing …

Household cash flows have improved as inflation has moderated and interest rates have declined, though budget pressures remain challenging for many Australians. Real disposable income per capita – that is, income after tax and interest payments and adjusted for inflation – has increased over recent quarters to be slightly above pre-pandemic levels (Graph 2.1).¹ Scheduled mortgage payments have declined as cash rate reductions have been passed through to lending rates, though remain higher as a share of household disposable income than before the pandemic. At the same time, households with mortgages have (in aggregate) continued to make extra payments into offset and redraw accounts, adding to their savings buffers. Information from the RBA’s liaison program suggests that some community services organisations have observed a levelling off in demand for their services, although it remains elevated.² Enquiries to services such as the National Debt Helpline appear to have stabilised over the past year.³

… and the share of mortgagors in severe financial stress remains contained.

Most borrowers have enough income to cover their scheduled mortgage repayments and essential expenses, and the share of borrowers facing a ‘cash flow shortfall’ has been declining. Just over 2 per cent of variable-rate owner-occupier borrowers are currently estimated to be experiencing a cash flow shortfall (Graph 2.2).⁴ Although this percentage is higher than before the pandemic, it is notably lower than the peak a year ago, with cash flows supported by the Stage 3 tax cuts, a moderation in inflation and reductions in interest rates.⁵ The share of borrowers at greatest risk of falling behind on their loan – those with both a cash flow shortfall and low prepayment buffers (lighter bars on Graph 2.2) – has decreased to around 0.7 per cent of borrowers. Consistent with this, the share of loans in formal hardship arrangements has declined over the past year and the share of households that are persistently drawing down on their cash buffers has declined relative to previous years, though in both cases remain a bit above pre-pandemic levels.

Ongoing strength in the labour and housing markets has helped to contain loan arrears at low levels. Overall, the share of loans more than three months in arrears has stabilised at around pre-pandemic levels (Graph 2.3).⁶ 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 conditions in the labour market have eased slightly in recent times, the employment rate in Australia remains near record highs. At the same time, housing prices have increased by around 10 per cent since the first cash rate increase in May 2022. This supported the value of collateral underlying households’ mortgages and reduced the share of borrowers in negative equity, even as mortgage repayments and cash flow pressures increased. Compared with a situation in which housing prices had not risen (or had declined), this has meant that more households experiencing acute financial stress would have had the option to make the difficult and disruptive decision to sell their property to fully pay off their loan, rather than falling behind on their payments.⁷

While the vast majority of borrowers continue to service their loans on schedule, the share of highly leveraged or lower income borrowers in arrears remains higher than before the pandemic. Highly leveraged borrowers – with high loan-to-valuation (LVR) or high loan-to-income (LTI) ratios – tend to be more likely to enter arrears, and are more vulnerable than other borrowers to unexpected changes in interest rates, income or expenses (Graph 2.4). Arrears rates for lower income borrowers remain higher than those of other borrowers, but have declined over the past year.

Pressure on existing mortgagors is expected to ease further in the period ahead based on projections in the August Statement, although the outlook is uncertain.

Higher incomes and lower interest rates are expected to support borrowers’ cash flows. According to the RBA’s central forecasts in August (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. 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 cash flows to be just above pre-pandemic levels (Graph 2.5). As well as further reducing the share of borrowers in financial stress, lower interest payments and increases in real incomes may enable some households to further increase their prepayment buffers. Equity positions of existing borrowers may also improve if housing prices rise further as interest rates decline.

Most households with mortgages appear well placed to weather an economic downturn should it occur.

Most borrowers have maintained large liquidity and equity buffers. These buffers help individual households withstand pressures on their cash flows, and inhibit stress from transmitting to the banking system via loan losses. The median prepayment buffer is larger than prior to the pandemic for all but the top income quartile, which in any case remains significant (a little under two years of scheduled repayments) (Graph 2.6). Additionally, mortgagors’ equity positions are strong, with less than 1 per cent of households currently in negative equity – a meaningfully lower share than before the pandemic (Graph 2.7).⁸

Large buffers would help insulate households and protect the banking system from loan losses in most plausible adverse circumstances. The May Statement presented a ‘trade war’ scenario that, among other implications, resulted in the unemployment rate increasing by around 2 percentage points. Under this scenario, the vast majority of mortgagors are expected to be able to service their debts, though some would have to reduce discretionary spending to do so (Graph 2.8). This resilience of borrowers reflects several factors: (i) their large liquidity and equity buffers; and (ii) that mortgagors tend to be less directly affected by a deterioration in the labour market and therefore the vast majority are likely to remain employed.⁹ Even under the much more severe hypothetical scenario that APRA considered as part of its 2024 stress test – which assumes the unemployment rate increases to 10 per cent, GDP falls by 4 per cent and housing prices decline by 40 per cent – the RBA’s household-level stress testing model suggests that less than 4 per cent of borrowers are estimated to be at severe risk of falling behind on their repayments and the majority of these borrowers would still have enough equity to make the difficult decision to sell their home and repay their loan in full.¹⁰

The RBA, together with the other CFR agencies, will closely monitor potential housing-related vulnerabilities that could emerge over time as financial conditions ease.

Housing-related vulnerabilities are contained at the present time. Lending standards have remained prudent and riskier forms of lending – such as high debt-to-income (DTI), high LVR and interest-only lending – are currently contained, although there are early signs that high DTI lending has started to pick up. While growth in housing credit and housing prices has increased over recent months, at least partly in response to lower interest rates, this is to be expected and is a standard part of the monetary policy transmission mechanism. So far, the response of housing prices and modest response of credit have been within the range of historical experiences of previous easing phases.¹¹

Vulnerabilities could build if the actual or anticipated easing in financial conditions encourages households to take on excessive debt. While current lending standards are robust, a material increase in risky lending in response to lower interest rates could contribute to a build-up in vulnerabilities in two distinct but related ways: (i) by amplifying the housing price and credit cycle; and (ii) by increasing the risk that borrowers may struggle to service their loans in future. In turn, these can increase the risk, severity and macroeconomic implications of future shocks. During the pandemic monetary policy easing phase, the share of borrowers taking on large debts relative to their income increased notably (Graph 2.9). The subsequent monetary policy tightening phase and increase in the serviceability buffer reduced the flow of high DTI borrowing and, while the vast majority of the borrowers who took out large loans relative to their income have been able to weather the large increases in mortgage repayments, a more protracted period of risky lending and/or a more severe shock could have seen more of these households default on their loans.

A sharp rise of investor activity from already elevated levels could lead to a build-up in financial vulnerabilities if it significantly amplifies the housing credit and price cycle. Historically, investor activity in the Australian housing market has tended to pick up in response to lower interest rates. Growth in investor housing lending has increased further over the past year and is above its post-GFC average (Graph 2.10). While investor lending in Australia has historically had lower default risk than other types of mortgage lending, investor activity tends to drive housing price dynamics to a greater extent than owner-occupier activity (and investor loans may prove to be at greater risk of default in a severe downturn).¹² Investors might be more likely to sell their investment property if they expect prices to fall because many properties incur carrying costs (net of rental income) and because it is an investment rather than their principal place of residence. Conversely, periods of rapidly rising prices might create the expectation of further price rises, drawing more investors into the market as capital gains can be a larger part of their decision to purchase. A high concentration of investors could therefore contribute to a housing price upswing that raises the risk of, or exacerbates, a subsequent market correction down the track. If sufficiently severe, such a downturn could deplete households’ equity buffers – particularly for new and highly leveraged borrowers – and result in broader economic disruption.¹³

2.2 Businesses

Conditions remain challenging for some Australian businesses, as evident from higher insolvency rates in some industries, but risks to the financial system appear low.

Total company insolvencies have risen over recent years, following a period of exceptionally low levels during the pandemic, to be around longer run average levels as a share of operating companies.¹⁶ The increase reflects challenging economic conditions and a catch-up effect from exceptionally low insolvencies during the pandemic.¹⁷

Company insolvency rates remain elevated for small construction, discretionary retail and hospitality businesses (Graph 2.11).¹⁸ This reflects ongoing cash flow challenges in these sectors given subdued growth in demand, and thin operating margins for some construction companies. Insolvency rates in other industries have also increased, although to a much lesser extent.¹⁹ Data on businesses’ deposit account balances suggest that high cash buffers built during the pandemic have returned to more normal levels across small and medium enterprises (SMEs), which is likely to have contributed to the normalisation in company insolvency rates in most industries. Personal insolvencies of business owners – which includes both owners of companies and individuals acting as sole proprietors or in partnerships, many of which are in the construction and hospitality industries – have increased over the same period as company insolvencies, although from very low levels.

Financial stability risks stemming from the recent increase in insolvencies remain contained. This reflects that most insolvencies have involved small companies or companies with little bank debt. Accordingly, while banks’ non-performing business loans have been edging higher over the past two years, they have remained at low levels overall, and considerably below post-global financial crisis levels. Banks are also well prepared to deal with potential losses on these loans. The recent drivers of business loan performance are discussed in more detail in Box: The recent increase in banks’ non-performing business loans. While very disruptive for the affected individuals, the indirect effects of insolvencies on the broader economy and financial stability, for example through job losses at insolvent companies, have been limited by the small size of these companies and resilient labour market conditions helping most affected employees to quickly secure new employment.²⁰

Despite ongoing pressures, the business sector remains resilient overall given stable profit margins, strong credit availability and generally robust balance sheets.

Most businesses’ operations remain profitable (Graph 2.15). Operating profit margins (which are calculated before deducting interest, tax, depreciation and amortisation expenses) are around the levels recorded during the 2010s for most businesses. SME profitability data available as of the March quarter 2025 suggests most of these firms were able to maintain (or slightly improve) their operating margins, despite strong input cost growth over recent years.

Larger businesses’ balance sheets remain a little stronger than historical averages, which has improved their ability to absorb shocks. ASX-listed companies continue to hold more cash relative to their monthly operating expenses than prior to the pandemic, supporting their ability to manage potential disruptions to their cash flows (Graph 2.16). Leverage ratios are also well within the historical range, which supports the ability of these companies to access liquidity from bond markets or lenders if required. More generally, aggregate corporate sector leverage – which is most representative of the balance sheets of medium and large businesses – remains low. Information on small businesses’ leverage is limited, as many of them obtain loans ‘off balance sheet’ by borrowing against the business owner’s residential property. However, recent housing price growth is likely to have supported their balance sheet positions.

Lenders’ ongoing appetite to lend to businesses is supporting resilience, including for smaller businesses. Heightened competition for business loans, including from non-bank lenders, has supported credit availability for some businesses and reduced refinancing risks over the past year. While strong business credit growth has not been associated with a broad decline in lending standards to date, the RBA is monitoring this closely as it is important this remains the case (see below). Other factors, including automation of loan approval processes in recent years, has also improved small businesses’ access to credit.

Businesses’ cash flow pressures are expected to ease as recent cash rate cuts gradually pass through to lower interest expenses.

The capacity of larger companies to service their debts is expected to improve over the next year, as interest expenses decline. Lower borrowing costs typically take some time to pass through to interest expenses of larger firms because many of them issue fixed-rate debt or hedge their interest rate exposure. Based on the outlook for GDP growth, recent easing in financial conditions and market expectations of further easing as of the August Statement, the debt-weighted share of ASX-listed firms with a low interest coverage ratio (ICR) – historically associated with greater risk of insolvency – is projected to decline (Graph 2.17). More broadly, as this share is around historical lows and balance sheets are generally a little stronger than normal, most larger companies are also expected to be resilient to weaker-than-expected demand should it occur.

Cash flows are expected to improve for most smaller businesses, though it might take time for conditions to normalise in industries experiencing the most stress. Pass-through from the lower cash rate is likely to be quicker for small businesses than larger corporates, particularly for those with variable-rate business loans secured with a residential property mortgage. Additionally, the central outlook from the August Statement for a gradual recovery in private demand and slower growth in unit labour costs implies a further easing in cash flow pressures over the year ahead. However, the incidence of financial stress is expected to remain relatively high for smaller businesses in the construction, hospitality and discretionary retail industries because some of these businesses accumulated sizeable debts in recent years – such as overdue trade credit or unpaid GST collected on sales. But, as outlined previously, the risks to lenders from these smaller firms are contained. For further details, see Box: The recent increase in banks’ non-performing business loans.

There is also considerable uncertainty around the global economic outlook and trade policy, which have the potential to affect Australian businesses. Business liaison suggests that most firms have not reported significant direct impacts on their operations to date. Market-implied default probabilities for ASX-listed companies increased earlier in the year alongside elevated uncertainty, but have since fallen back to be slightly above their usual levels. While an adverse trade shock would create stress for some businesses, certain features of the most trade-exposed firms would support resilience. These features and the extent to which Australian businesses are exposed to global trade and financial market risks are explored in 4.1 Focus Topic: How Overseas Shocks Can Affect Financial Stability in Australia.

Leverage in the business sector is not expected to increase notably in response to easing financial conditions, but regulators will be closely monitoring for signs of deterioration in lending standards.

Despite strong supply and demand for lending, leverage is not expected to pick up notably in response to an easing in financial conditions. Historically, business leverage has tended not to be particularly sensitive to monetary policy easing phases in Australia, as these periods are generally associated with weaker demand growth. Looking ahead, the modest outlook for demand growth from the August Statement means businesses’ appetite for increasing their leverage is likely to remain limited. Moreover, the larger-than-normal cash buffers currently held by many large companies could provide a cheaper alternative to fund expansion in the near term than taking on external finance such as debt, though some firms may opt to retain cash due to uncertainty about their cash flows.²²

However, the RBA and other CFR agencies will continue to closely monitor for any build-up of vulnerabilities. Other than a slight easing in CRE lending standards (discussed below), there has been little evidence to date that the strong competition for business lending by banks has led to a broader decline in lending standards. Nevertheless, since business credit extended by banks and non-banks has been expanding at a strong pace for some time, the RBA, in conjunction with other CFR agencies, is monitoring this closely. A material erosion in lending standards could lead to a build-up of vulnerabilities in the sector and undermine future resilience. Monitoring extends beyond regulated entities like banks to include business credit supplied by non-bank financial institutions (NBFIs). Information on some non-bank lenders is more limited, in particular for private credit firms. If losses on private credit deals picked up, these would be passed through to their investors and potentially cause stress for those with large exposures. However, systemic impacts would likely be limited by the sector’s small size (see Chapter 3: Resilience of the Australian Financial System).

2.3 Commercial real estate

Fundamentals continue to improve across most Australian CRE markets and there is little evidence of financial stress among owners of CRE.

Fundamentals have improved and valuations have stabilised across most CRE markets. Office valuations have increased a little over the past year, consistent with rising rents. There are some markets that remain weaker – including lower grade office properties and those located in areas with high vacancies, such as parts of Melbourne – but conditions in these markets remain stable. Growth in industrial property rents and valuations has been strong, driven by increased demand for warehousing and data centres.

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

• ASX-listed A-REITs’ financial positions remain strong (Graph 2.18). Earnings have grown over the past year, and leverage has remained stable. Interest coverage ratios should improve further as lower borrowing costs pass through to interest expenses.
• The share of banks’ CRE loans classified as non-performing is stable and remains low by historical standards. Liaison with banks suggests that CRE loan quality is expected to improve.
• Liaison with non-bank lenders suggests that their loan performance also remains sound. That said, visibility is limited, particularly among lenders with significant exposures to lower quality assets or riskier borrowers.

There continues to be strong appetite for Australian CRE from investors.

Interest in Australian CRE from investors remains strong (Graph 2.19). Liaison and industry research suggest there is strong demand for Australian property, particularly from overseas investors and for office and industrial property. Over the past year, foreign buyers accounted for around 30 per cent of transactions by value, slightly higher than the previous two years. Despite the historically narrow spreads between yields (capitalisation rates) and risk-free rates, Australian CRE yields remain attractive relative to returns in some comparable markets, such as Europe. This has the potential to continue to support Australian valuations through inflows of foreign capital.

Banks’ exposures to CRE have increased, but risks to the financial system remain contained.

CRE loans have increased as a share of Australian banks’ assets in recent years, reflecting growth in lending by the major banks (Graph 2.20). However, liaison suggests a notable share of this has been increased lending to existing customers deemed to be lower risk, which has limited any potential build-up of vulnerabilities. Systemic risks from non-bank lenders also appear limited by the sector’s small size (see Chapter 3: Resilience of the Australian Financial System).

Strong competition in CRE lending could undermine the future resilience of the CRE sector if it leads to a deterioration in lending standards.

If strong competition among lenders reduces lending standards materially, this could undermine the future resilience of the sector. Heightened competition in CRE lending, from both banks and non-bank lenders, has led to a slight easing in some lending terms over the past year. For instance, some banks have loosened loan covenants, or lowered presale requirements for residential developments, although they generally remain firm on other terms. A broader easing in CRE lending standards would increase the risk that credit is extended to riskier borrowers, undermining the resilience of the sector.

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

This includes both renter and mortgagor households. For more detail, see RBA (2025), ‘Box B: Insights from Liaison’, Statement on Monetary Policy, August. 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. 3

The share of borrowers in cash flow shortfall is based on estimates for income and essential expenses. The Securitisation System records income when the loan is originated. To estimate current income, origination income is grown forward using the Wage Price Index. To estimate essential expenses, we 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

Cash flow shortfalls are estimated using minimum scheduled mortgage repayments based on outstanding interest rates. As many lenders do not automatically adjust repayments when rates fall, excess payments typically accumulate in offset or redraw accounts. It is assumed that borrowers in financial stress would reduce repayments to the minimum amount by contacting their lender. 5

While the share of housing NPLs has trended up over the longer term, it remains low and has not been accompanied by a corresponding increase in overall loan losses. See Chapter 3: Resilience of the Australian Financial System. 6

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. 7

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. 8

For more information, see RBA (2024), ‘Box: Few Borrowers Would be at Risk of Default Owing to a Substantial Deterioration in Labour Market Conditions’, Financial Stability Review, September. 9

For more details of APRA’s 2024 stress test, see Lonsdale J (2025), ‘Striking the Right Balance Between Regulation and Risk’, Speech to Australian Banking Association Conference, Sydney, 24 July. 10

Credit plays an important role in the transmission of monetary policy: easier monetary policy encourages and enables households to increase their leverage, driving increases in asset prices, which in turn lifts activity. Beyond its effect on asset prices, lower interest rates can also stimulate consumption and investment through the savings and investment channel. A decrease in interest rates lowers the return people earn on their savings and decreases the cost of borrowing. As such, they will tend to save less and invest and consume more. See Mulqueeney J, A Ballantyne and J Hambur (2025), ‘Monetary Policy Transmission through the Lens of the RBA’s Models’, RBA Bulletin, April. 11

In the United States, United Kingdom and Ireland, for example, investor loans became much riskier during crises. See Cassidy M and N Hallissey (2016), ‘The Introduction of Macroprudential Measures for the Irish Mortgage Market’, The Economic and Social Review, 47(2), pp 271–297; Zemaityte G, E Hughes and K Blood (2023), ‘The Buy-to-let Sector and Financial Stability’, Bank of England Quarterly Bulletin; Albanesi S (2022), ‘A New Narrative of Investors, Subprime Lending, and the 2008 Crisis’, in M Schularick (ed), Leveraged: The New Economics of Debt and Financial Fragility, Chicago University Press, pp 79–136. 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 has 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

See RBA (2025), ‘Minutes of the Monetary Policy Board Meeting’, August. The Monetary Policy Board discussed and approved the financial stability advice to the CFR and APRA. 14

See CFR (2025), ‘Charter’; RBA (2025), ‘Memorandum of Understanding Between the RBA and APRA’. 15

In cumulative terms, total company insolvencies have risen back to their pre-pandemic trend, following a period of exceptionally low levels during the pandemic. However, the pre-pandemic trend is a conservative benchmark because it does not account for strong growth in the number of operating companies over the past five years (all else being equal, a larger number of companies in Australia means that the number of company insolvencies will be higher). 16

The catch-up effect over recent years reflects the removal of significant support measures introduced during the pandemic, including the Australian Taxation Office (ATO) resuming enforcement actions on unpaid taxes. For more details, see RBA (2025), ‘4.3 Focus Topic: The Recent Increase in Company Insolvencies and its Implications for Financial Stability’, Financial Stability Review, April. 17

Company insolvency rates shown in Graph 2.11 measure company insolvencies as a share of operating companies. Figures in the September 2024 and April 2025 Financial Stability Review measured company insolvencies as a share of operating businesses, a broader population that includes unincorporated businesses. 18

The introduction of small business restructuring may also have slightly affected aggregate insolvencies since 2021. This currently accounts for around 20 per cent of company insolvencies. For more details, see RBA, n 17; Australian Securities and Investments Commission (2025), ‘Review of Small Business Restructuring Process: 2022–24’, Report No 810, June. 19

See RBA, n 17. 20

Insolvencies of individuals acting as sole proprietors or in partnerships are included in insolvencies of business owners (together with owners of companies). 21

See La Cava G and C Windsor (2016), ‘Why Do Companies Hold Cash?’, RBA Research Discussion Paper No 2016-03. 22