Signs of credit risk improve despite higher rates

The illion Credit Stress Barometer for September 2023 continued to indicate a long-term trend toward deteriorating credit default risk.

Data revealed that the credit default risk among Australian consumers surged by 11 per cent since January 2022 and further increased by 8 per cent by September 2023.

Nevertheless, a positive signal emerged with a 2 per cent decline in Q3 2023, marking the first sign of improvement in approximately 12 months.

illion suggests that Australian consumers may have begun adapting to their economic circumstances by positioning themselves better to manage associated risks.

Positive influencers contributing to this potential turnaround include an improvement in the risk associated with consumers holding credit cards and personal loans.

Cara Giovinazzo at Borro said clients need to consolidate their unsecured debt like credit cards and personal loans to help secure a loan.

“We try to encourage our clients for unsecured debt not go past 10 years,” Ms Giovinazzo said.

“If they’re really struggling financially and they want to free up cash flow a bit consider a 10-year home loan as a separate split to help with cash flow, but just making sure you’re not paying back that debt over 30 years and incurring 30 years worth of interest.”

However, illion’s data noted there’s no clear turnaround in mortgage stress, particularly in major capital cities. Home loan borrowers, especially from these cities, and renters remain vulnerable due to escalating servicing and housing costs.

Barrett Hasseldine, illion’s head of modeling, mentioned: “There is still a higher risk of consumers defaulting on their credit cards and personal loans, but that risk has slightly decreased in the last quarter.”

As this improvement predates the recent interest rate rise in November 2023, it may also raise questions about the longevity of this tentative turnaround through Q4 2023 and into 2024.

“All in all, July, August, and September 2023 have been another challenging quarter for Australians and although economic circumstances have not improved in a material way, it’s encouraging to see the pressure not increasing for Australians with credit cards and personal loans,” Mr Hasseldine said.

“However, the impact of November’s interest rate rise and any additional short-term rises, may have an unfavourable impact on this trend and tip Australia back into higher stress.

“This next quarter may be the one that confirms whether it’s light at the end of the tunnel or the proverbial freight train.”

Melbourne and Sydney struggles

The data reflected ongoing struggles regarding mortgage holders in major capital cities like Melbourne and Sydney.

In NSW, the default risk for mortgage holders remains stagnant at 0 per cent, while Victoria and the Northern Territory witnessed deteriorations of 2.5 per cent and 14 per cent, respectively.

This situation seems closely linked to rising household costs, particularly affecting households whose income growth hasn’t kept pace with inflation or where savings/assets couldn’t absorb these additional expenses, according to Mr Hasseldine.

“The rising cost of living appears to have weighed more heavily on households whose income growth has not kept pace with inflation or where savings/assets have been insufficient to absorb this additional expense,” Mr Hasseldine said.

[Related: Aussie banks to increase credit risk buffer in 2023: APRA]