Australia at risk from major global financial shock, Reserve Bank warns

The Reserve Bank of Australia has issued a warning that the country is at risk of a major global financial shock, citing mounting threats to the global financial stability. The central bank's latest financial stability review, a biannual assessment of the financial system, states that while households are well positioned to handle the combined pressures of rising interest rates and falling property prices, Australia is not completely insulated from the impact of a sudden collapse within the global AI investment boom.

The bank's findings reveal that less than 1% of borrowers, or fewer than one in every 100, owe more on their homes than their value, despite the ongoing property price declines this year. The Reserve Bank estimates that negative equity, where the mortgage amount surpasses the property's market value, is primarily a concern for recent homebuyers who took out loans nearly equivalent to the property's value.

The report acknowledges that recent buyers with this situation are more likely to now be in negative equity, though the share of borrowers falling behind on payments remains limited.

The RBA's assessment suggests that even a 20% drop in property prices would only push around 5% of mortgages into negative equity, demonstrating the significant value gains most homeowners have experienced over the years. Despite this, the bank warns that a loss of confidence in the AI investment boom could lead to "disorderly asset price corrections" and that Australia is not entirely immune to the potential repercussions.

The central bank highlights the ongoing conflicts in the Middle East and Ukraine, as well as intensifying strategic competition among major powers, as contributing factors to these threats. Additionally, the high valuations in global corporate debt and share markets make them vulnerable to a sudden correction. The RBA also warns of the rising risk of cyber-attacks, potentially amplified by AI, and a potential sharp sell-off in global bond markets.

In summary, the Reserve Bank warns of a perfect storm of external factors that could potentially destabilize Australia's financial system, emphasizing the need for vigilance and preparedness.