Stable on the Surface, Cracking Underneath What the RBA isn’t Saying Out Loud
Caution Beneath the Calm
Australia’s financial system enters 2026 appearing broadly resilient on the surface. Banks remain well capitalised, households are on the mend, and loan losses are close to historic lows. Yet the Reserve Bank of Australia’s March 2026 Financial Stability Review—released amid intensifying Middle East tensions—reads less like a clean bill of health and more like a measured caution framed in reassuring terms.
Global Risks Building in the Background
The source of that caution begins offshore. Equity and credit markets started the year with elevated valuations and compressed risk premia. At the same time, hedge fund leverage has climbed to record levels. Any meaningful correction in global markets is unlikely to remain contained—it would quickly flow through to Australian funding conditions. The RBA stops short of forecasting a downturn but makes clear that the ingredients for a disruptive episode are already in place.
Households Improving, Oversight Tightening
On the domestic front, households have made tangible progress. Real incomes improved through 2025, supported by tax relief, easing inflation, and two rate cuts. The share of variable-rate borrowers under cash flow pressure has dropped to just above 1%, and arrears have returned close to pre-pandemic norms. However, investor lending is picking up pace again, and high debt-to-income borrowing is on the rise. APRA’s updated lending restrictions, introduced in February 2026, reflect a proactive approach—tightening conditions before risks emerge more clearly in default data.
Divergence Across Sectors
Conditions across the business sector remain uneven. While overall insolvency rates have normalised, industries such as hospitality and construction continue to face sustained pressure from rising costs, narrow margins, and stricter tax enforcement. Small and medium-sized enterprises in these sectors are operating with margins well below the national average, with many reporting losses. While systemic risks appear contained, stress at the industry level remains evident.
Property: A Tale of Two Markets
The commercial property landscape is increasingly bifurcated. Industrial assets have reached record valuations, driven by strong logistics demand. In contrast, CBD office markets continue to grapple with a widening disconnect between valuations and rental income as hybrid work reshapes demand. This imbalance represents a more subtle vulnerability, largely concentrated within institutional and non-bank exposures.
