With many now believing that Australia’s inflation peak is behind us, and rising interest rates may be at or near to a peak, new findings released today by credit bureau illion, suggest companies be mindful that the resulting credit stress has not yet peaked.
Given that the RBA’s raising of interest rates aims to tighten credit, thereby potentially exacerbating credit stress, the new report offers a warning that the pain will only grow if interest rates remain high for the foreseeable future.
“Our data shows that credit stress has continued to rise throughout the first half of 2023,” said illion Head of Modelling, Barrett Hasseldine. “illion’s Credit Stress Barometer shows that in the quarter from April to June, credit stress rose 11 per cent year on year, which means that in 2023, Q2 has seen a similar rise to Q1.
“There is no real evidence yet that a turnaround in credit stress is in sight. In fact, the current trend suggests that credit stress is continuing to climb, with no clear improvement observed as yet.”
Direct causes of the accelerating increased credit stress include substantially higher overdue repayments on revolving and consumptive credit (credit cards, consumer loans, and student loans); a rising trend in overdue home loan repayments with no sign of moderation; greater demand for consumptive credit; a falling rate of home loans opened – lower affordability or capacity to refinance; higher rent obligations; and substantially lower saving balances.
“illion’s Credit Stress Barometer suggests that there has been a large rise in credit card and home loan delinquencies, as well as rising credit card demand,” added Mr. Hasseldine.
The latest Barometer suggests that personal savings have fallen significantly, but have possibly found a bottom now, with Australians unable to tap into any more moneys due to increased costs.
Savings balances have been depleted, falling in Q2 by an average 25-30% YOY. The last half of the year includes months such as November and December where savings are traditionally lower due to consumer days such as Black Friday and Cyber Monday, and then of course Christmas.
“Many households in Australia have limited scope for generating a surplus and we see the number of households like this increasing as credit stress continues to rise”.
Another interesting finding from illion’s Credit Stress Barometer is that personal wellbeing is also beginning to suffer, with consumers taking on higher personal risk to help manage stretched budgets.
This has manifested in many ways such as the substantial fall in health insurance spend since October 2022, with this expense now 10% lower in June 2023 YOY. This fall implies that Australians are choosing to drop cover, reduce cover, or increase their insurance claims excess to reduce costs.
Not out of the woods yet
Despite inflation rates falling and rate hikes becoming less frequent, Australians should remember that, according to illion’s findings, the pain felt by the current economic conditions has damaged household budgets and may continue to do so until incomes begin to catch up.
Against this however, over the medium term, Australians will also need to guard against the ‘double edged sword’ to their finances from falling consumption if Australia falls into a recession that adversely affects their employment stability.
Irrespective, in the short term, the Australian economy may need to prepare for higher levels of credit stress, from higher credit delinquencies, if more people continue to come off fixed loans and endure higher rates of interest on their home loan.
“We are seeing the deterioration in home loans as quite striking,” said Mr. Hasseldine.
“High rates could be with us for some time and credit stress may continue to build for as long as these rates are high.”
About the data
The data included in this media release has been taken from illion’s second Credit Stress Barometer. This is compiled from the credit data from more than 18 million credit consumers in Australia. illion’s data set is widely acknowledged as being amongst the best in the country.
Head of Corporate Affairs