Will rent defaults cause an Australian mortgage crisis?

Bloomberg has speculated that widespread defaults on rental payments by tenants of property owners could ignite a mortgage crisis in the United States:

As the days go by in an unprecedented shutdown of the U.S. economy to slow the coronavirus outbreak, any amount of rent looks increasingly difficult to cover for a wide swath of Americans, from recently fired service workers to local small-business owners. Unfortunately for those most affected, these payments can’t simply be wiped out — at least, not without dire repercussions…

This, more or less, is the catastrophic “domino effect” that real-estate investor Tom Barrack, chief executive officer of Colony Capital Inc., warned about this week. Simply put, if commercial tenants don’t pay rent because of a lack of cash, then property owners might be squeezed and default on their mortgage payments. The same goes for homeowners. That could bring the problem squarely onto the balance sheets of large U.S. banks, which will suffer steep losses on their loans…

At first, it might have seemed as if Barrack was simply talking his book. But as more details emerged about the carnage across the $16 trillion U.S. mortgage market, it’s clear that the complex web of financial obligations tied to real estate could again be the flashpoint that leads to a financial crisis without some sort of intervention.

Part of the reason that mortgages are again veering into crisis mode is because the modern market has so many moving parts.

Could the same happen in Australia? It is hard to say.

Renters in Australia tend to have lower incomes than home owners and they usually work in less secure employment. Thus, they are highly exposed to any acute economic fallout from the coronavirus.

We also know that over one-third of mortgages in Australia are for investment purposes, many of whom would likely be unable to meet their repayments if their tenants stopped paying rent.

Already, we have seen hundreds of thousands of Australians sign a petition demanding a freeze on rental payments, which has been slammed by the NSW real estate body:

The state’s peak body for real estate agents says any bid to freeze rent payments to ease the strain on cash-strapped tenants’ during the coronavirus crisis is “effectively asking the landlord to provide social housing”…

Real Estate Institute of NSW chief executive Tim McKibbin said the industry body feared the government would remove tenants’ obligations to pay their rent…

“By removing the obligation of a tenant to pay rent, merely transfers the difficult financial circumstances of the tenant to the landlord.”

There are also fears that the collapse in international student numbers could crush the rental market in parts of Sydney and Melbourne:

“The fall in arrivals, and in particular in temporary long-term migrants, is likely to have a notable impact on demand in rental markets through 2020, as the first port of call for most new arrivals is a rental dwelling,” Charter Keck Cramer said.

“Rental markets at most risk from the consequent drop in tenant demand due to lower net overseas migration are around the suburban universities”…

Ultimately, whether renters default, in turn causing a mortgage crisis, will depend on a number of factors, including:

  • Whether the federal government provides greater income assistance to households and small businesses, for example via a temporary universal basic income; and
  • The extent to which Australian banks provide mortgage repayment holidays.

The situation is fluid.

Leith van Onselen

Comments

  1. Do you see the banks being willing to trigger mortgage defaults given their level of exposure to the housing market?

    • From the ABC (https://www.abc.net.au/news/2020-03-26/are-banks-freezing-mortgages-banks-putting-payments-on-hold/12090642):

      ANZ CEO Shayne Elliott told Perth radio station 6PR, the reason banks are capitalising interest comes down to Australia’s banking laws.

      “If we don’t charge you interest, even if we defer it, your loan becomes what they call ‘impaired’ and that means that we have to go and allocate a whole bunch more capital to support your loan.

      “If we do that, as an industry, we will not have enough capital. That wouldn’t be in anybody’s interest.”

      • ‘“If we do that, as an industry, we will not have enough capital. That wouldn’t be in anybody’s interest.”’
        When that sentence is parsed in that manner it makes it sound like the ‘industry’ they are talking about is the mob. Also is private seigniorage of public money in everybody’s interest? They also don’t define capital.

      • Talk about dominos …. how easy would it be for the banks to raise capital right now? Almost impossible. The inter-linkages within the economy are manifest and the only answer is for the Govt to put money in the pockets of all citizens – or the dominos start falling.

  2. Is this the end of the supposed “Miracle Eeconomy”? It’s easy to make the case:

    • the drought had already reduced agricultural exports;

    • bush fires and coronavirus had already slashed foreign tourist numbers;

    • the epidemic has cut foreign student numbers;

    • the epidemic will potentially cut future mineral and energy exports, especially exports to Australia’s principal market of China;

    • meanwhile we have a metropolitan environmental lobby actively trying to close down or obstruct Australia’s export coal, gas and some agricultural industries. Where do they imagine the money comes from to pay for their lifestyle?

    • import substitution industries (the former manufacturers) have been destroyed by four decades of so-called “economic rationalism” making us utterly dependent on foreign imports for essential goods. Likewise, a productive rural Australia – which actually enjoyed a comparative advantage on international markets – was gutted by domestic “competition policy” (a policy which somehow managed to exempt politically powerful oligopolies like banking);

    • meanwhile the workforce has been diverted into doing really useful things . . . like superannuation funds management! Which monkey dreamt up the notion that Australia could ever have a comparative advantage in financial services?

    • even domestic oil refining capacity has been closed down to the point where we now have no security of supply for refined product;

    • the proceeds from a once-in-a-century commodity boom were been frittered away by venal politicians. Even before the GFC, Howard and Costello had put in place structural spending increases in a vain attempt to win the election, and this was followed by deliberate fiscal stimulus under Rudd. There has been no serious attempt to control government spending for more than 13 years;

    • strategic monopolies, essential services, critical databases and tax farms have been sold off to private financiers and the proceeds squandered by State government (on really useful things like sports stadiums!); and

    • the distorted tax system has created a dangerous housing boom which puts Australian house prices at record highs both historically and by comparison with all other countries, and Australian household debt is likewise internationally high.

    Is there anything I’ve missed?

    Coronavirus may be a catalyst but this crisis has been 30 years in the making.

      • In the long run it might save the human race.

        In the short run it won’t save the balance of payments.

      • PalimpsestMEMBER

        It can help if we export Hydrogen. Japan has a demand, and there was a proposed pipeline project to Indonesia, based our our ability to generate cheaper renewable energy than most countries. Nothing can replace a major export industry overnight. We can plan for it though and start now, but that would take forethought, and a willingness by Government to support it half as much as they do mining and petroleum.

    • Yes, corona-virus is the catalyst but the Govt and the media will spin it as the cause – ad infinitum. Ignorance or willful blindness, I don’t know. Either way, the citizens will be convinced of it.

      • Opportunists gunna opportune….. & here’s their perfect excuse.

        Don’t you ever let a chance go by, oh lord, don’t you ever let a chance go by…..

    • Stephen – great post, thanks.

      On “what have I missed” – you could mention among your first few points that retail was already crumbling due to high household debt and stagnant wages.

      The broader points you make are spot on. Here’s an additional way to look at it.

      Australia is maxed out. Everyone is maxed out. Maxed out on debt, on rent, on housing, on consumption. No-one has any buffers left.

      This means that unless government intervention / stimulus / support can replace EVERY dollar of spending which the economy is losing due to coronavirus, then EVERYTHING falls over. Even a ten per cent reduction in income, or rent, or house prices, or sales, means default, or sackings, or bankruptcy. The “everything crash”.

      So people need to ask themselves: is the government willing and able to both accept – and deliver – so much stimulus cash that ALL coronavirus-related losses (and bushfire losses, and drought losses) are 100% covered?

      Because if they aren’t, or if they can’t roll it out fast enough, then the collapse of the entire house of cards is a certainty.

  3. haha,
    in the Complacenstralia this will never happen…

    we are being rorted for fuel for decades and not a single voice, not even from intelectuals.
    complacency basics, a school example

  4. last 12 months I noticed lot of apartments and houses that were listed for leasing were actually made up as if someone lived in them. Very high quality kitchens, floors, bathrooms etc.. I commented many times that it appears that many struggled to make repayments and started to move back with their parents so they can generate extra income by leasing their properties. This way these people would not have to default and be able to reduce their mortgage.
    I think this trend started as many loan holders started to shift from IO to I+P and realised numbers did not add up.
    If renters start moving with their parents then almost every person holding multiple IPs will be under water and forced to sell.

    • there is an app that is RE version of beauty cam.
      it is prevalent in Brisbane.
      you take pictures of empty home, superimpose furniture and human traces, adjust the perspective (a hard one for IQ deficient industry) and voila…. your homw is now not spewing sparkles that scream “empty for months”

      • we were in the market and actually visited few of those I described. but you might be right many that we saw online might have used such app.

  5. Via Facebook:

    The Property Owners’ Association of NSW Inc
    What’s Coronavirus got to do with asking for a rent reduction? Do you ask for a rent reduction when you have the flu? Tenants are using the media hype to find an opportunity to pay landlords less. Why? Because The Tenants Union told them to do that earlier this week and it’s triggered an avalanche of these requests. Stop, think and investigate the tenant situation. As many tenants at present are just trying it on. Ask to see proof of hardship and or ill health or inability to work and earn. Tenants need to ask the Govt first for help and then only then do they approach the landlord. The landlord is not the welfare office and so far the Govt has done bugger all for them to be able to even consider a rent reduction.

    • $550 in a landlord’s tax deduction and $550 in welfare each cost the budget the same $550. Funny no mention about the media hype about speculating on shelter.

      • Pretty sure Dyllip got his @r5e handed to him in the first round by his landlord, judging by yesterdays comments.

        • As I suggested to him yesterday – if his landlord’s a bikie gang member, I’d be inclined to pony up. Or pack up and f*ck off in the middle of the night.

    • Cam tenants ask landlords for proof of their financial viability? No?

      Then what right do landlords have for asking the same of tenants?

      Further, the idea that tenants do not have genuin money problems in the current situation is almost proposterous – the economy is shutting down! What psycho would assume the opposite?

      • A) sure you can ask for financials of landlord, you can also refuse to supply them. In both cases the option is to accept the agreement or not. While renters exceed supply it is a lot easier for the landlord to refuse though.

        B) Well Dyllip up there is living proof it’s true. If I could be bothered I’d dig up the exact quote from yesterday but the genreal feel was he was going to his landlord to demand a rent reduction and got all bent out of shape when refused and the landlord suggested he’d rented in a suburb he couldn’t afford because that was BS. So clearly not having financial problems and was just putting it on.

  6. ‘The state’s peak body for real estate agents says any bid to freeze rent payments to ease the strain on cash-strapped tenants’ during the coronavirus crisis is “effectively asking the landlord to provide social housing”’
    Cool well then when this is over it’s time to stop socialising the landlord’s speculation losses on shelter. And to adjust the rate of immigration to not favour landlords at the expense of Australia’s social value. And to adjust the tax system to not favour landlords.
    ‘“By removing the obligation of a tenant to pay rent, merely transfers the difficult financial circumstances of the tenant to the landlord.”’
    Well that’s the liability risk you take on with an ‘investment’ and landlords should have cash buffer to cover cash flow problems considering the majority of the profits flow to the landlord. Landlords shouldn’t expect reward without risk.

    • No, that’s not the liability risk you take on. No where is there a requirement to provide free housing for people. If you can’t pay your rent, move out and give the opportunity to re-rent it. THAT would be the actual risk the landlord takes.

      ps Everyone should have 6 month salary cash buffer, not just landlords.

      • Fine – lets go with your analogy for a second.

        There should definitely not be any mortgage relief for land lords based on your scenario – no chance.
        This means of the 1 million people who applied for welfare last week – 50% would have a mortgage -(statistically speaking) 500,000 mortgages going belly up over night. Would – without doubt systemically collapse the Australian economy.
        The remaining 500,000 none of whom will be able to afford their current rent – would all move out and only offer 1/10th of their current payments – all that is possible.

        Land lords would be in the situation of having lost all their tenants – and no one taking up their leases. Mass homelessness within the month.

        Banks will foreclose on those land lords within weeks as they are incapable of paying their mortgages without the rent money. End up losing their IP and their own home which is sold for cents on the dollar in a collapsed market.

        How are you doing now mate ?

        • I’m doing fine, and at this point there is no welfare for mortgage holders.
          The banks have very generously offered people a loan to pay back their current loan, to then pay back later, at the same interest rate. This is what the mortgage holiday effectively is.

          • “no welfare for mortgage holders” if they are investors they get welfare, and have for years, negative gearing for example.

        • Also, your doomsday scenario is what will be required for the housing and economic reset that seems to be a wet dream for a select group of commenters here. Anything less and we will be back to normal again fairly soon.

  7. Lenny Hayes for PMMEMBER

    There amount of International students out of work at the moment must be frightening. They generally live hand to mouth in the service industries and would have been the first to cop a bullet.

    Currently trapped in the country but once flights resume I think you will see a mass exodus which would include walking away from rental accommodation.

    Landlords are going to cop it sweet regardless.

    • A rental holiday as well as a mortgage holiday is going to collapse the Australian banking industry – no way they can survive both.

    • codeazureMEMBER

      I’ve been thinking about this as well. 2.3 million temporary visa holders who have no social safety net when things go bad.
      So many are living 8-12 in a 2 bedroom flat. Apart from the virus spreading likelihood of such an arrangement, how will they cope with being in a total lockdown in that situation?
      Now that flights are cancelled for an unspecified amount of time, they are trapped without income. Regardless how much we may wish we didn’t have so many in this country, this is an awful situation for anyone to be stuck in. A psychological and financial torture.

      • Lenny Hayes for PMMEMBER

        I just did a quick straw poll of four friends I know around Oz – a Kiwi, couple of Indians and a European.

        The Kiwi and European are still in jobs but about 5-6 of their friends are out of work with no access to local support and no way home. The Indians are both now out of work and around 10-12 of their circle of friends are also unemployed.

        Luckily the Indians have a bit of money up their sleeve from family back home so they will be ok, but there would be a ton of their less well heeled compatriots trying to live off savings and/or loading up the credit card.

        Will be interesting to watch how full the carparks get once the flight ban is lifted…….

      • Agree totally, I think we will see a substantial reduction in students studying outside their home countries – it has suddenly become the high risk option. Students are already comparing what’s going on here to their classmates back home and guess who’s better off? These kids (talking mostly about the Indians and Nepalis) have come here thinking they’ve got it made – easy courses where attendance doesn’t matter, a migration system which turns a blind eye to visa extensions year after year, cash in hand from casual jobs, chain visas for their wives and parents, PR down the track. Suddenly that’s all gone and students now have to pay tuition fees from their family savings which don’t exist! If they don’t pay their visa is cancelled and they become illegal – goodbye to PR, free health care. They are now in a personal hell of their own making. If they are far into their studies they might stick it out and beg reduced fees. If they just arrived, how many will return home, never come back and become the warning for all their friends and families against overseas studies? The 20 year bubble in overseas students has come to an end.

  8. And yet these Lordylands will be working hard to have some relief from their loan repayments. Pot kettle etc

    Real estate needs to be crunched 50% plus….. this needs to be a crisis to fix Australia’s obsessions of Real Estate and China.

    • mortgage payments will at best be deferred. As in will have to be paid later.
      Unless the tenants plan to pay double rent for 6 months after their rent holiday it isn’t directly comparable.

      • I like the way you double renters repayments but land lord repayments are stretched out over 30 years. Vested interest much there champ ?

        • I’m quite happy for the government to give loans to the renters, or you can explain how else to do it?
          And noone has 30 years left on their loan, so maybe try some actual facts.

  9. Leith Van Onselen

    I very much disagree on your points regarding low and high income earners on housing. Most of the battlers I know have a mortgage and an IP driving a Porsche and eating toast in the cold of night as they can’t afford heating or food – while the renters are both on 6 figure salaries. we pay $600 / week for a quarter acre block 8 minutes from Melbourne CBD by car – easily a $2.8 Million house. Its an idiots game housing – great 10 years ago no doubt.

    The entire housing issue comes down to peoples jobs. Lose your job get a mortgage / rent freeze – it really is that simple.

    Now – keep your job – keep paying your mortgage and your rent. What happens when KEEP YOUR JOB but your IP can no longer pay the rent ? What happens when your IP relies on AirBnb ? Students ? Serviced apartment for business ?

    There are also going to be 50,000 deceased estates sales.

    And once this is all done – the mortgage holidays ends – but unemployment will remain well above 10%.

    The housing crash is 100% certain.

  10. Can’t wait for a journo to ask the PM what people should do if they have to choose between food and housing costs.