Uncertainty in Finance
With all the uncertainty of the past two years, including record-low interest rates, property market uncertainty, and rising oil prices, many Australians are reassessing and refining their household and business finance strategies. The Reserve Bank of Australia says this makes a lot of sense at the moment when most households and businesses held robust financial positions before the Delta outbreak in 2021. But nothing stays the same for long in this world, so if you want to know how households and businesses might be exposed to short- and long-term vulnerabilities, keep reading.
The good news is that larger financial systems in Australia have been resilient to the effects of the COVID-19 pandemic. Banks cushioned the economic impact of the pandemic and have supported recovery by deferring loan repayments and new lending. Government support in the form of JobKeeper and JobSeeker payments has also supported many businesses and households over the past two years.
The short-term vulnerabilities appear when households and businesses operate without a financial buffer. For many businesses buffers were used up over COVID, leaving them vulnerable to short term shocks, as we’ve seen recently in the floods crisis. The RBA predicts that not all businesses will recover from these short term shocks, and insolvencies will rise.
However, they will rise from already low levels. Households generally have built better financial buffers during the pandemic, with higher saving rates in the first half of 2021 than for most of the past decade and therefore may be better placed overall to deal with short term shocks.
Long-term vulnerabilities are more likely to affect property owners. The rising cost of living has been a reality for a while, but rising oil prices will push the price of food and petrol up even further. If wages remain below pre-pandemic levels and interest rates rise as predicted, some borrowers will likely have to use their financial buffers and ultimately default on their loans. However, this is mainly a risk for borrowers that are both highly indebted and have low liquidity buffers and this group accounts for less than 1% of owner-occupier borrowers according to Securitisation System data. The average owner-occupier in Australia is suitably placed to withstand the long-term impacts.
Savvy property investors will recognise that now is the time to account for rising costs of living in your budgets, particularly when considering loan repayments and building financial buffers. Market and financial uncertainty mean that it is more important than ever to work with a knowledgeable property expert when considering buying or selling property.
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