Can you remember your last holiday? How good did it feel to get a break from the grind, whip out the ol’ favourite Hawaiian shirt and budgies, and free yourself of some of your regular responsibilities? Pretty damn good, right? But, like all good things, the worst part of any great holiday is when it ends and you’re left with a pile of washing, jet lag and a maxed-out credit card.
For one in 10 mortgage holders in Australia, the mortgage deferral holiday is nearly over.
Back in March when COVID hit, the banks were quick to offer mortgage deferrals for up to six months for those facing financial hardship due to job losses or vacating tenants; a move we have never seen before. For small business loans, the proportion was even higher at 16.2 per cent, or $53 billion worth of loans.
The deal wasn’t as charitable as first impressions may have led one to believe. Throughout the ‘holiday’, mortgages still accrued interest (which compounded) so the loan amounts have either grown or lengthened. Simply put, people who deferred their loans now have bigger loans and the economy has hardly bounced back to pre-pandemic levels. However, this is a much better scenario than a flood of forced sales.
The September cliff hanger
As of June 2020, 11 per cent of all housing loans had been deferred amounting to $195bn. Now that mortgage deferments are winding up and JobKeeper and JobSeeker payments have been reduced, the fear of property prices falling off the ‘September cliff’ has been mounting.
Concern about an oversupply of listings coming onto the market as these two events occur, potentially restricts growth and exacerbates the possibility of negative growth in the market.
There is a push from APRA to extend the total deferment period to 10 months, ending March 2021 to mitigate a sudden wave of loan defaults. While this has not eventuated as yet, the banks have extended the deferral period by four months taking the end date out to January 2021.
On the bright side
Of the loans that have been deferred, only 11 per cent have an LVR >90 percent; a higher risk category with minimal to no equity. This figure, coupled with the national price growth of 8.9 per cent between July 2019- April 2020, shows us most would be ‘ahead’ if they bought pre-COVID. In other words, the vast majority of the deferred loans are low risk.
Research from the RBA shows foreclosure is significantly less likely when the borrower is in a positive equity position and that appears to be the case for most of the mortgage holiday makers.
The danger zone
The markets which are more likely to see a combination of negative equity and mortgage arrears are mining regions, such as the north western region of WA.
Perth is the only capital city where the value of houses in dollar terms is now below where it was in 2007 so you could expect there to be a lot of negative equity in this region and other areas that were similarly affected by the resources boom.
Not all cities are created equal, nor driven by the same forces. Once inside each city, there will be tightly held areas and others with an abundance of supply. This is also true for some areas of Perth.
So what does the market have in store for us?
No-one wants to see people default on their home loans. Banks will do whatever they can to avoid defaults on mortgages and bad debt write-offs. And knowing how much the financial sector is tied to mortgages, state and federal governments are loathe to see a housing market crash.
It’s no surprise then that in July, banks announced mortgage holiday extensions of up to four months would be made available for those still experiencing financial difficulty at the end of September. The federal government also announced a loosening of credit restrictions for lenders, making it easier for people to borrow. This is a significant gesture from the government and will have a massive impact on both the banking and property sectors, not to mention the industries and businesses that support these two mammoth areas.
If you are in a situation where making pre-pandemic level repayments is difficult, your best bet is to talk to your bank and find out what your options are to reduce your interest rate or switch to interest only. Foreclosure or selling your property at a loss is a very extreme scenario and not likely considering the low stock levels and strong buyer appetite. However, it also prompts the question: Is now a good time to sell if you are anticipating some financial pain?
We only have to look at Brisbane and Sydney property markets which have experienced strong recovery to see that post lockdown pent up demand will drive a surge in transactions.
It’s easy to get caught up thinking the government only has one way to ‘prop up’ the property market or stimulate the economy but the range of measures we’ve seen over the last six months shows there are many ways and a lot of support to keep the property market alive and kicking. JobKeeper and JobSeeker supplements did not single handedly save the property market so their demise won’t bring it down. Building incentives, relentlessly low interest rates and the recent easing of lending restrictions all point towards property being a high priority in the Australian economic eco-system and a healthy comeback is on the horizon.