Mortgage stress to rocket as unemployment surges

Martin North from Digital Finance Analytics has forecast that mortgage stress will rocket from 32.9% currently to 37.4% as unemployment soars to 7%:

Westpac just released a revised economic outlook…

Just last week they had set the forecast peak in the unemployment rate at around 5.8%- 6%, up from the current level of 5.3%.

But now the unemployment rate is now forecast to reach 7% by October 2020 (up from the previous estimate of 5.8%-6.0%) due to the larger negative shocks to the labour intensive sectors such as recreation; tourism; education; renovations and additions; and dwelling construction. This lift in the unemployment rate is despite reducing the participation rate from 66.1% to 65.4% as a discouraged worker effect – that is, as workers respond to a deteriorating labour market the participation rate is likely to decline…

This is consistent with our modelling – mortgage stress will rise in the months ahead as unemployment rises.

Now the question becomes, to what extent with the banks forego mortgage repayments, and not foreclose, and to what extent will the Government supports households directly? The mortgage debt mountain could bite deep and early…

Our own modelling is based on the assumption the crisis will run for at least 6 months. Overnight a UK report suggested 18 months is more likely, given the lead time to a vaccine.

Personally, I think Australia would be lucky if unemployment peaked at only 7%.

The fallout will depend largely on the policy response. The Morrison Government needs to immediately backstop the economy by providing income support to both households and businesses.

It should start by immediately lifting Newstart by $95 dollars a week (as proposed by ACOSS) and loosening eligibility criteria. This would provide a vital social safety net that protects the many people that will lose their jobs (as well as those unemployed already languishing). It should also provide cash grants to households and small businesses, as well as suspend quarterly tax installment payments.

Doing so would provide an automatic stabiliser for the economy that would help to prevent a deeper economic depression.

Leith van Onselen

Comments

  1. Lenny Hayes for PMMEMBER

    Will any bank foreclose on any mortgage in this environment ?. I just can’t see them wanting to wear the wrath that comes from forcing people out into the streets.

    Easier to give the punters a 12 month loan “holiday” surely ?.

      • Lenny Hayes for PMMEMBER

        Means housing doesn’t really go anywhere for 12 months then (or whatever the holiday is).

        Post that would be interesting if sales are trying to find a market…..

        • Something like 30% of sales are involuntary.

          Next few months no one will willingly sell – after that people will want to sell and involuntary sales will skyrocket. (Dead people, foreign owners of real estate, etc). On top of that are tens of thousands of developments (apartments, townhouses, estates) coming into the market.

          The involuntary sales being the only ones happening will be driving the market – since no one will be buying – NO ONE – prices will absolutely tank.

          Some people will definitely start to pick the detritus – and will cause fluctuations, but nothing sustained.

          Consider the carnage from no one buying for 12 months.

          • I’m willingly on the market from today.

            Take 2 from bushfires/drought/Xmas/agent incompetence. I know, I know, my sanity ought be questioned – life decisions and all. Bit of FONGO though too…

    • I thought our issue is, 30% of banks funding from overseas for the mortgage market.. and those creditors are owed their monthly repayments. So if you arent getting the repayments from mortgage holders, what are you paying to the overseas creditors?
      And if you’re thinking of not paying the creditors, who’s lending you the money? Is RBA or govt debt going to be large enough to replace this required funding? As it is, the market for RBMS dried up late last week as I recall from Banking Day…
      They’ll have to sell SOME houses won’t they? And whilst the govt will try not to kick out owner occupiers, why would they try and save investors who will be forced to sell to cushion the impact of the funding they need to provide to bail out the banks? It’s not like the owners will be out on the street if they have their own house.. I think all that will happen is, govt making it illegal to kick out renters when the place sells for a few months. Worst thing will be having people move around, be homeless during a pandemic. We need shelter in place and hence shelter.

      • Picking Bottom

        I think depressed renters will move in with family when times are tough, that would lead to more empty rental properties, lead to more forced sales etc.

        • Yeah, thats my point though, the move itself requires people to be out and about.. and putting grandparents at risk anyway.. during quarantine, o you really want a mass displacement of people around the country?
          China reported people effectively homeless because they were travelling on public transport when the quarantine came bearing down in their province… moving houses will be frowned upon when u are trying to isolate.

      • Jumping jack flash

        THIS!

        The flow of money from our banks to their banks can’t stop or there will be a credit crunch again. This flow can be replaced by government printing I guess, but how to account for it? Simple QE?

        Also, don’t forget about the interest. The interest on this global nonproductive debt glut is the beast that has slayed the global economy.

        Nonproductive [mortgage] debt removes money from an economy. Only through productivity it gets replaced. Productivity gets taxed by the shortfall between the interest repayments on the existing debt, and the amount of new debt created that can be used to repay that interest.

        Productivity is also being moved offshore and disbanded because getting rich from someone else’s nonproductive debt is far easier than being productive… and we end up with exactly the mess we are currently in.

        It is very simple to understand and then realise exactly why things are happening as they are, like interest rates being run down to zero (interbank rate only, of course) and QE is firing up (free money given to the banks to sell as debt), and more importantly, why these measures will ultimately fail.

  2. Reverse Transcriptase

    Non COVID post:

    Speaking of RE champions, I noticed that for reasons unexplained, Mr IQ’s (Nathan Birch) last YouTube installment from his ‘headquarters’ was in fact filmed on the street on a cold blustery day in front of what looks like an office building. On a calm sunny day I can understand, but why is Nathan on the street??

  3. maybe people missed the news but official number of unemployed in China went up by 1% (5 million) in Jan and Feb

    I’m sure ABS can make unemployment as low as PM needs

    • Jumping jack flash

      Yes, just redefine “unemployed”. Nobody seems to care if the definition changes, they still compare the old numbers against the current numbers for political point scoring.

      The new definition could be that if anyone so much as thinks about working then they are not unemployed. Its a good definition because not thinking about working will be a requisite for collecting unemployment benefits. While filling out their form, they will be asked whether they considered working over the last fortnight, and if they did, then no money for them.

      Of course, also as a requirement for collecting unemployment benefits they will need to call up at least a couple of businesses and ask if they have any work going, thereby thinking about working and nullifying their entitlement to benefits.

      The other beauty of this definition is, we all know what happens when someone asks you not to think about something….

      We will certainly get to 0% unemployment using that definition!

  4. Jumping jack flash

    7% unemployment measured using the Howard Definition would be near catastrophic, and far worse than the 11% measured by the Pre-Howard Definition which was still in use during the Recession We Had To Have.

    The Howard Definition of unemployment was cleverly devised so it could never really get much above the socially acceptable level of unemployment enforced by the media du jour, of 5%+/-.

    Yes, 7% is going to be pretty concerning.

  5. The govt missed the best opportunity to flood the mkt with debt and raise billions for infrastructure/public works building and boosting coffers…..conservatives have always been too focused on a surplus…still thinking rates are above 7%…

  6. What is going to happen to the bullshitting foreign workers who are going to be unemployed with no access to assistance from our government? Bullshit Uni student with no cafe/taxi work etc.
    The genuine Aussie battler renters need not fear. Withdraw the rent in cash and tell the landlord/agent your mobile etc. is fucked but they turn up- in person as I will be lying on the kitchen floor with Covid 19 and collect the cash. No cant leave in letterbox etc as it is too unsecured at present and transaction needs to be person to person. Cough cough sniffle let yourself in and Ill hand it to you personally whilst we both sign the receipt.

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