$173b mortgage cliff beckons for Australia

The Australian Banking Association (ABA) has released data on loan deferrals to 12 June.

772,600 loans have been deferred across Australia, including 480,700 mortgages:

In dollar terms, $234.1 billion total loans have been deferred, including $173.5 billion of mortgages:

According to the ABA, around one in 14 mortgage holders have had their repayments deferred.

The large volume of deferrals raises the clear and present danger that Australia could face a loan repayment cliff once the six month grace period is over. As noted by Alan Kohler last week:

If the deferred loans were treated as impaired this year rather than deferred, and the big four’s share of them was the same as their 80 per cent share of total loans and advances – probably a safe assumption – impaired loan expense would be 16.6 per cent of their loans and advances and would more or less wipe out their capital…

After six months, the support program runs out in September, at which point, it is assumed, $224 billion in loans, plus whatever is deferred between now and then, would instantly become 90 to 180 days in arrears…

September is rushing towards the banks. How many of the 744,904 people and businesses, and counting, will be able to resume repayments? How long can loan deferrals go for? What proportion of the loans must be classified as impaired at September 30? What provisions must be struck for future impairments? How much capital would need to be raised to cover these sums? If it’s a 12-figure amount (that is, more than $100 billion), who will supply it?…

But if the government’s various income support packages end in September and October, as planned, the bank support will have to begin, or else the pandemic crisis will turn into a financial crisis like no other.

A welfare payment cliff coinciding with a loan repayment cliff is a scary prospect for the Australian economy. It’s also a clear downside risk for Australia’s property market.

Easy credit was behind much of the meteoric rise in Australian property values. Therefore, any contraction of credit and/or forced sales would necessarily weigh heavily on the market.

Leith van Onselen
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Comments

    • A lot of equity …

      Which is why it won’t be the case. ScoMo’s voter-base are up to the eye-balls in their favourite dividend stocks and they need to be looked after if he is to win a 2nd term.

    • A government owned bad bank will be created that will take the loans off the banks probably close to face value. The banks will walk away… just watch.

    • Jumping jack flash

      NIRP is pretty much essential if we’re going to increase the amounts of debt people are eligible for to keep this economy-circus running.

      Wage subsidies forever are also essential. The government still has a lot of debt capacity. They will be forced to use it.

  1. And yet the msm continue to say that property is on the move due to record low interest rates, demand from first time buyers etc. It really is shaping up as a massive depression.
    It will be very sad watching the bank of mum and dad go to the wall. No REPO for Nan and Pop.

    • Things have started selling massively this weekend in my area it seems. see my comment from the weekend.

      https://www.macrobusiness.com.au/2020/06/weekend-links-13-14-june-2020/#comment-3908968

      I have also just got back from a run and the 2 places that were for sale on my route now have sold signs on them. Early last week this wasn’t the case. I don’t know why they are selling all of a sudden, but it has me worried that prices are on the up.

      And lets be honest, with the amount of unprecedented stimulus we are seeing – billions from loan deferrals, and the supposed 150-200 billion from jobkeeper/seeker, super withdrawals, low interest rates, etc. I’m not surprised to see a lot selling. Lets say how the end of the year goes though without the stimulus. And maybe a second round of virus, just to scare people away from their more social activities.

      • Jumping jack flash

        I have noticed quite a few signs in my area as well. A nice area. I would probably buy here if prices were just 2/3rds of what they currently are. “Offers over 500K” for some place that literally looks like a shoebox. It does have a ton of solar panels though.

  2. Hill Billy 55MEMBER

    Anecdata from Toowoomba over the weekend. 5 properties inspected, 4 couples at one, 3 of the properties had 2 couples inspect, and we were the only people at the final home open. In driving past other house opens, similar lack of people. Very different from prior experience of house opens in Toowoomba. Toowoomba has been a bit of a hot spot for property, as also evidenced by Martin North in his analysis. Very much an accident waiting to happen with a lot of new builds and even now developers going strong.

  3. There is no September cliff. Its going to be “extend and pretend” until outright defaults flow through to the banks, at which point Mr RBA steps in to buy bad debts from the banks at 100c in the $1 with freshly printed $$.

      • How they deal with existing debt holders is pretty clear to me. However, its not clear at all how they put a new fire under lending and property prices.
        Mass immigration is off the table for at least 12 months, lending rates are as low as they will go, and I am not sure lending standards are going to drop either. What will push property prices up over the next 1 or 2 years?
        I see a lot of downside and not much upside – but I have been saying that for many years 🙁

        • Jumping jack flash

          Agree. Debt is forever. It is right up there with death and taxes.

          It has to be, otherwise the very foundations of our financial system wouldn’t be stable and nothing could be trusted if debt was simply consigned to the aether at some random point in the future because of something absurd like “too much” debt.

          I mean, that’s what *cough* interest rates are for *cough*

    • Jumping jack flash

      infinite QE and wage subsidies forever.

      Australian public debt is around 0.5 trillion dollars. Private (mortgage) debt is 2.4 trillion. At face value it seems the government can take on a bit more yet.

        • Jumping jack flash

          AUD doesn’t seem to care, in fact some say it is still too high.
          Interest rates to <0 (cash rate) so that's all taken care of too.

          Its government debt so it will be ultra low rate without a negative cash rate anyway.

  4. My partner has been trying to get a loan to take over an IP from her ex as part of their property settlement. Career public servant, 6 figure salary and perfect credit record, but her application has taken over 6 weeks at one of the major banks, and now she’s shopping around.

    If that’s the general experience then I’d have to assume that credit (at least for IP loans) is tight out there.

  5. Steve GlossopMEMBER

    I know a number of people who have had their loan deferred. In each case they are still employed and could have kept making the repayments, but thought why not build a bit of a cash flow buffer as adding a few months to the loan at the end with rates at 2.5% makes no difference to their life.

    Perhaps the cliff won’t be as bad as the headlines are suggesting.

    • Sound good until they upgrade their car or even just splash out on a new tv or some nicer clothes. Cash in the bank has a habit of disappearing real quick if your not prudent.

      • Jumping jack flash

        I was thinking the same thing. It doesn’t take long for costs of living that are marching ever upwards due to the quest for debt, absorbing all spare capacity, even “fake” spare capacity caused by loan deferment.

    • tripsterMEMBER

      I think there is a lot of this happening. It is probably only a relatively small percentage of people who applied for deferral who were truly at risk of imminent default without it.

      • two plus twoMEMBER

        I suspect that’s likely the case for now, too. But take away jobkeeper and the jobseeker boost and that might lift that percentage up considerably…?

    • I agree. Commbank automatically suspended payments.
      There will be a lot of cash building up which can be used to service mortgage payments when they resume.

    • If they can’t manage to save a cash buffer while paying their loan then they are screwed anyway. Your mortgage should not use up all of your discretionary income.

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