Aussie banks brace for wave of mortgage defaults

Australia’s banks are bracing for a tsunami of mortgage defaults as emergency income support and mortgage deferrals are gradually unwound:

This was expected but has now become more urgent as bank call centres contact hundreds of thousands of people who have put their loan payments on hold in the last few months as an emergency measure.

National Australia Bank’s group executive in charge of personal banking, Rachel Slade, says the lender is checking on about 10,000 borrowers with deferred loans every week, and most want to keep their payments paused for a further three months…

“It’s not in our interest or their interest to keep them on a deferral if it’s clear to us and to them that they’re not going to come out the other side of it. We’re much better off moving to helping them work through other options.”

Digital Finance Analytics managing director Martin North says… “I think between September and January we will probably see a bit of a rise in properties on the market from people who have concluded that they won’t be able to make their repayments”…

Tony Robinson, a former Victorian government minister and a director of Financial Counselling Australia… warns of a potentially catastrophic impact on stretched young families in the outer suburbs if banks act too aggressively to push borrowers to sell.

“There are some people for sure who may make the decision to sell. But if we end up with lots of people feeling they have no other decision but to sell, that will be a disaster,” he says.

The data is downright ugly.

According to APRA, $192 billion worth of mortgages have been deferred by Australia’s lenders, comprising 11% of total housing loans:

Moreover, more than one-third of investor mortgages have had their repayments deferred, a significant share of which are interest-only:

Martin North’s latest mortgage stress survey also showed that one quarter of property investors (more than half with a mortgage) are suffering negative cash flow, meaning their holding costs outweigh their rental income:

The key question is: how long will investors hold on to loss-making properties when the prospects for capital growth are so slim and employment prospects are so poor?

The key headwinds facing the property market are not going away any time soon and include:

  • High unemployment and falling household incomes;
  • Collapsing immigration, rising dwelling supply, and falling rents; and
  • Tightening mortgage availability as lenders become increasing cautious about borrowers’ ability to repay.

There is the clear and present danger that a feedback loop could develop whereby falling property values prompts investors to cut and run, which then places additional downward pressure on values, causing even more loss-making investors to sell.

Extensions to emergency income supports like JobSeeker and JobKeeper, alongside announced extensions to mortgage deferrals, will help to forestall any reckoning.

But sooner or later struggling mortgage holders and loss-making landlords will be forced to face the music.

Leith van Onselen

Comments

  1. Have a friend who is an aid worker. She took time off at the end of multiple contacts os to deal with burn out last year. Just managed to get back to oz before the borders closed, had a job fall through but eventually got something else. But as she’s working remotely from oz her salary is much lower as she isn’t getting the deployment component of the package and reckons she’s just above the minimum wage based on the hours she’s working. She has an apartment she rents out and the tenants went back to China but they paid out the lease which she’s very grateful for. The property was vacant for a bit but someone has signed a new contract. She reckons she’s down 30K on so far on the pay cut and having the property vacant and fixing up their mess. She can deal with that as she had 12 months of mortgage repayments saved up for exactly what happened (income loss and vacancy). She’s now madly saving up 12 months of living expenses in addition to 12 months of mortgage repayments. She had a very stressful couple of months and has been very prudent. I hate to think of what other people are going through because I doubt most were as prepared for things going wrong as she was

    • I think you’re right, I wish your friend well. Nobody has a crystal ball but with alarm bells going off everywhere it may be a good idea to at least consider all options.

    • DominicMEMBER

      I feel sorry for your friend but it should be said that this is what an economic Depression looks like — she’s early to the party. There are many more that will join her in coming years, sad to say.

      • It will be interesting to see what happens. She bought a 1 br apt in Brisbane about 3 years ago with a deposit that would have been at least 30% (but quite possibly higher) and she had the 12 months of mortgage repayments already saved up when she bought. She is single, mid 40s and felt like she had to enter the market (it is her first RE purchase). She did some research, but possibly not enough wrt the general macro environment and our bubble. Her apt is close to a uni which she thought would be protective against vacancies because there are always foreign students. She is good at her job and should manage to maintain employment going forward but if things get really bad despite her being more cautious than most I still think she is at risk of losing the property, though I think she’d have to be unemployed with it vacant for at least 12 months for that to become a real possibility. I do however think that over time she will find the body corporate fees a real drag. I was horrified at the fees though I think they are relatively low for the industry. If she loses it, then the bubble has really burst and Straya will be a very ugly place.

        • DominicMEMBER

          Her set-up sounds pretty conservative next to most so she should be fine. If she isn’t, we’re all in trouble.

          As for body corporate, that’s something that needs to researched very carefully — that can really cause problems down the road if the owner doesn’t understand the potential risks / exposure.

    • I think taking money out of super has masked the impact of such behaviors at an economic level.
      It is a long way down once that game is done.

      • I agree. I think the second half of this year, in particular Q4 will start to show of the cracks much more clearly and we’ll all have a better idea of the trajectory we’re on and how steep it is.

  2. Poochie the Rockin DogMEMBER

    I wonder how this will change the Australian psyche – if houses don’t double every 7 years then what’s left to believe in. I look forward to overstretched property investors paying for their greed though, the negative feedback loop can’t come fast enough

        • bobalotMEMBER

          As a Labor party member as well, I think we may have dodged a bullet with the last election.

          The various bubbles in the Australian economy were going to unwind. Coronavirus is simply the catalyst.

          A decade of mass temporary worker migration, property bubbles, low wage growth, low productivity growth (worker productivity is actually robust, capital productivity is terrible), relatively low private sector investment and government cuts to R&D and education were always going to catch up the the country sooner or later.

          The pain hasn’t even started and if Labor were in government, the Murdoch press and the Coalition would have blamed them for everything.

          • ErmingtonPlumbingMEMBER

            Yes I agree,
            I was saying before the last federal election that it was an election to lose.
            Best thing that could have happened for the Party long term
            Solidarity Brother.✊🏻

          • PaperRooDogMEMBER

            Yes, it will be good for Australia long term as now some of the ridiculous allegations against Labor from their GFC policies have/will be copied by LNP (which are the correct options in current situation) so the people won’t believe Murdoch’s BS (hopefully).

          • truthisfashionable

            My concern is that Labor had a great platform full of policy that will be needed to reshape (possibly rebuild) the economy but appear to have thrown everything out rather than just their ForeignGrannyKeeper policy.


    • if houses don’t double every 7 years then what’s left to believe in.

      Residential Property Price Index ; Weighted average of eight capital cities ;

      March 2013 – 103.2.

      March 2020 – 145.8

      145 seems a bit short of double 103.

      September 2005 – 72.1

      I guess ‘Property doubles every 14-15 years’ doesn’t have quite the same ring to it.

    • Tragedy of the Commons
      Description: Individuals use a commonly available but limited resource solely on the basis of individual need. At first they are rewarded for using it; eventually, they get diminishing returns, which causes them to intensify their efforts. Eventually, the resource is either significantly depleted, eroded, or entirely used up.
      Early Warning Symptom: “There used to be plenty for everyone. Now things are getting tough. If I’m going to get any profit out of it this year, I’ll have to work harder.”
      Management Principle: Manage the “commons,” either through educating everyone and creating forms of self-regulation and peer pressure, or through an official regulating mechanism, ideally designed by participants.
      Business Story: Several divisions of a company agreed to share a retail salesforce. Each district manager was initially concerned that the shared salesforce wouldn’t give enough attention to his or her particular business, and that volume would decline. One particularly aggressive manager advised all his account managers to set higher sales targets than were truly needed, so that the salesforce would at least give them the minimum support they needed. The other divisions saw this division pushing for extra work, and decided to employ the same strategy. The new salesforce’s managers wanted to accommodate all of their “clients,” so they continued to accept the higher requests from the divisions. This created a tremendous overburden of work, lowered performance, and increased turnover. Pretty soon, joining the retail salesforce was only slightly more popular than joining the French Foreign Legion, and each division had to go back to maintaining its own salesforce.
      Other Examples: Exhaustion of a shared secretarial pool. Deteriorating reputation for customer service after customers have had to listen to six different salespeople from six different divisions of the same corporation pitching competing products. (The “shared resource” in this case was the firm’s positive customer reputation.) A highly successful retail chain gives up on joint sales promotions with manufacturers after being deluged with proposals by enthusiastic manufacturers, or establishes terms for joint ventures that leave little profit for the manufacturers. Depletion of a natural resource by competing companies which mine it.

  3. working class hamMEMBER

    “It’s not in our interest or their interest to keep them on a deferral if it’s clear to us and to them that they’re not going to come out the other side of it. We’re much better off moving to helping them work through other options.”
    Surely the banks are using downgraded asset prices to calculate the people considered for deferral extension?
    Be very interested in seeing Martin Norths best/worst case probability predictions. Last time, he seemed to downgrade the likelihood of an extensive fall.

    • If the banks handle house loans like they have handled problem farm loans for the past 10-15 years, they will do anything to avoid owner selling up at low price.

      You had to be fairly dumb/stupid to be forced to sell.

      • What a load of tosh.

        Watch the 4 corners episodes (there are plenty) on the plight of farmers during the last drought – it was tragic and across the board resulting in one of the single biggest consolidations of Australian farmland in our entire history. You’re speaking straight out the cloaca.

        The requirements for banks to show leniency was based around the Nationals holding sway over the liberals and the idea of food security used as an excuse to protect country party voters.

        ..

  4. Can I make a couple of points re above
    * “they want to defer their repayments for a further 3 months” that’s what they are telling the bank
    1. They want to defer their payments for 30 years not 3 months
    2 Many will be deferring for 30 years

    ** “Cut and Run” to where and to whom???? No one is getting this there won’t be buyers… property is illiquid. You can’t sell if there is no buyer
    This is the great Australian Property Crash, I accept if you couldn’t see it last year when I said it was coming but if you can’t see now…. come on,….

    • You’re right. Most people at the time didn’t see the ’29 crash coming until it happened, but even with these history lessons on board it’s amazing how so many still confuse ponzi schemes with solid investments.

      • To be fair, he’s always claimed that the metro areas are going to go bust specifically, led by Melbourne. That’s not the target property.
        Having said that Sydney + Melbourne is 60% of the RE market, so you can’t NOT have a crash if those go bust.

      • working class hamMEMBER

        Rural hobby farms have gone to moon. The housing bubble ruined many coastal/rural areas with Melb/Syd tree/sea changers.
        The prices of these acreages are even more decoupled from the reality of locals.
        The wealth effect flooded into these areas like foreign investment into the CBDs.
        I hope these burn the brightest, allowing regional kids a chance.

        • Mate the asking prices for rural properties is the biggest joke of all time – this one is a perfect example – $1 MILLION – perfectly reasonable – to whom ? Buffet ?

          The most economically depressed NON ABORIGINAL region of Australia is probably south Gippsland – economic wasteland – prices rival NSW saphire coast and northern coasts – certainly equal to and often higher than the peninsula and red hill.

          Its the single biggest joke in world real estate history.

      • I honestly don’t think I have ever seen anything quite so ridiculous, and demonstrative of just how far removed from reality the Australian view of house prices is with that absurd post Gav.

        A tin shack – almost 2 hours from Melbourne, miles from any town, on a bush block with almost no usable land and no water except a small dam which looks realistically unusable – $1 MILLION DOLLARS.

        Its corrugated tin on rammed earth. Seriously mate !

        I just have no words for how utterly risible that is. Beyond all comprehension. Flabbergasted that you have posted that as some sort of example of remotely reasonable.

        That listing is worth, as fair value – $200k

        That would be reasonable.

        • +100 for the gist of the comment (not so much the tone of the comment) – the argument that they are not making any more land might apply to mountain tops and headlands but there is an endless supply of 120 acre blocks of goanna country. It is neither a viable economic unit nor does it have amenity.

          • exactly. Unproductive hobby farms can’t wash their own face.

            I’d like a “golf course” style development for farmland. You aggregate all these hobby farms into a commercial size, have a sheering shed as common property you can book out and be of a scale you can keep a professional farm manager on it. You get your house in a little corner and can keep involved as a part owner. I like visiting friends with farms but I’ve never been one for too much farmwork myself. I still remember the early 80s drought when my family got out of cattle (livestock can die) and just went cropping, less emotional.

        • The rainfall was my first thought as well. They have kept the grass reasonably green in this small area around the house, but I worry that the rest of the acreage might be very brown.

      • DominicMEMBER

        When the inevitable crime wave sweeps the city, that rural place will seem like paradise, for sure. The only slight downside to paradise is that you are a bit vulnerable so you’d want to have some security and perhaps a sh0tg#n licence.

        • Pretty sure Gav moved down to Eltham from up north having grown up as kid in Melbourne.

          I know that area Gav has posted very well – and its an absolute horror show. It looks green simply because of the recent rain. Most of the year its just dust. Not “a bit dusty” – just dust. And rock.

          The only places worth even living in around there are generally Woodend, Kyneton, Daylesford and Macedon because they have mountains nearby which help cause rain shadows – thats WHY the towns are near by.

          • Arthur Schopenhauer

            Yep, you have to be south of the great divide, and over 400m in elevation, otherwise it’s a long hot summer and a cold bitter winter.

          • DominicMEMBER

            What ^^^^ he said.

            Slightly different scenario, but I had a friend who farmed in South Africa for a few years and he had to travel fairly often, while his kids were off at boarding school, leaving the wife all alone on the farm (with several loaded guns, I grant you, but still).

            People on farms, wherever in the world are always easier targets than those in towns and cities.

    • Really keen to see mortgage rates go up to signal that the powers to be have fully given up on the housing market. If not, if they can make the banks not charge extra for the higher risk that everyone appreciates, surely there is still lots of power in the back somewhere…
      BUT no doubt, I think there is a crash progressing and the ball is rolling..

    • BoomToBustMEMBER

      Everyone is still ignoring the elephant in the room that comes with deflating pricing – Banks risk weighting. As property prices decrease and the risk increases the banks according to Basil 3 will be required to move the risk classification of most / all of their property books. In doing so they are required to hold more liquid capital.

      Where does this liquid capital come from, probably from either raising interest rates, capital raising from shareholders or reduction in lending or a combination of all 3. Either way the amount of money available for loans will dry up significantly further reinforcing the feedback loop.

      What is the tipping point for this reduced weighting is my question.

  5. The Traveling Wilbur

    How ironic that the virus that triggered the cause and effect sequence logically outlined in the article above, also triggered a shortage of tissues. I could do with a couple around now.

  6. … Why did the Central Bank of Ireland cap mortgages at 3.5 times annual household incomes following their 2007 event ? …

    Mortgage Measures – Central Bank of Ireland

    https://www.centralbank.ie/financial-system/financial-stability/macro-prudential-policy/mortgage-measures#:~:text=The mortgage measures are aimed,-income (LTI) limits.

    All Editions – Annual Demographia International Housing Affordability Survey

    http://www.demographia.com/db-dhi-index.html

    What have Australia and New Zealand learned ?

    • The Traveling Wilbur

      Because the Central Bankers of Ireland are a bunch of commies who don’t want to let people in their country have a real go / craic?

      • Display NameMEMBER

        Interest rate buffers, Debt to Income ratio limits? These are for pu88ies. We dont do macro prudential in Australia. We pretend and extend. How else did Westpac peak out at 52% IO loans. There was no prudential supervision. Why else was the RC terms of reference explicitly excluding macro prudential regulation as an avenue of investigation

  7. adelaide_economistMEMBER

    Of course people want to keep deferring – they believe in property price magic (aka the Australian way) and of course they may get their wish. Every one of us has watched two decades of throwing the policy kitchen sink at boosting house prices and to a lay person why wouldn’t they expect ‘government’ to save them yet again. Not to mention how much of what passes for being ‘someone’ in this country appears linked to whether you ‘own’ a house or not. The size of the debt attached to that ‘ownership’ never gets a mention though.

    People are going to drag this out because they are fully anticipating (probably correctly) at least another round of mortgage deferrals beyond this second one, then the process of foreclosure is long, slow and drawn out at the best of times let alone when the volumes involved are massive. Presumably there’ll be an expectation (again, likely too) of another round or two of super withdrawal permitted, the revised dole may be more generous for those who are ‘covid19 unemployed’ versus the pre-existing ones and naturally there’ll be enormous political pressure on the banks (as well as them not wanting to flood the market) which will slow down any action.

    By the time this plays out many will be betting (and may be right) that the government will be back to flooding the place with migrants and students having decided that ‘covid19 couldn’t be beat’. This will be of particular interest for our ‘have a go’ mum and dad investors who seem very keen users of the mortgage deferral when they should be the ‘savvy’ ones selling now. An orderly sell down of the worst cases would benefit everyone but since when has that happened? The banks are probably trying to do the ‘right’ thing here but as the quoted story shows, it’s already being turned into a morality play. Remember that indebted home owner lives matter; renters not so much.

    So what will make people sell? They’ll sell for the most part if they have to and not before. Well, not before prices crater at least 15 or 20% then they’ll be a rush but until then? Nope. Hold on and wait to get rescued. That’s the plan in most cases. Heaps of people will be kidding themselves they will get a good job in the next few months – almost none will. They’ll burn their super withdrawal, any redraw/offset and flog off anything they can get their hands on in the interim. Then end up selling for less and with no buffer. But again – the mindset at play in most Australians is just degrees of Nathan Birch. Shirts might be cleaner but the view is identical in that housing is where everything is at.

    • Display NameMEMBER

      I think the banks will need to be thrown a bone to extend again. This must be affecting profit / dividends. Shareholders will not be happy, and by extension the board.

      • DominicMEMBER

        I’m not so sure — I think it’s fairly clear that those who need to extend for another 3 months are not going to make it.

        The banks are best off agreeing to an extension on the basis that the ‘owners’ sell up in that period.

    • There is absolutely no fear. And I’ve found the new replacement for bog roll – any renovation item, including tradies.

      This week I called three window suppliers to replace two windows, never heard back. Called two garage door mobs to replace a roller door, never heard back.

      It’s super money, it’s redraw and the fear of losing it, it’s international travel money that can’t be spent, it’s jobkeeper and above all else, if the economy REALLY is ratsh1t, it’s madness.

    • working class hamMEMBER

      Nailed what I was thinking yesterday.
      The banks are going off book though, maybe they don’t have the cahona’s to stay the course.
      I think they realise that they would have to put their trust in Scomo, bloke folds like a cheap suit.

    • The take from 2008 in the US is not to leave the house you are in unless forced to. If the crisis becomes bad enough for long enough you may be left in place as cheap caretakers

  8. OK. I swear things look more expensive than just 6 months ago. I mean, I know it’s a dumb thing, but this thing here: https://www.spotlightstores.com/nz/craft-hobbies/paper-craft/cutting-tools/cricut-mini-easy-press/BP80489101
    It only came out late last year. I bought it in April when they finally got some in stock after wuflu disruptions.
    So now, it’s $130 per link.
    I went back to check my reciept and usually, if it is on sale, there is a discount noted because they can’t just mark down their entire asset of stock.. it was definitely $95 on 9th April.
    I can’t explain it, but when I spoke to hubby, even he said that yes, things look more expensive.

    • Mining BoganMEMBER

      Asking prices for used sports and outdoor gear on ebay and gumtree seem to have gone up. A case of folk went wild at first lockdown then super money so shops got cleaned out, hence second hand prices to the moon.

      Now I have to wait for the WuFlu surge of goods to be placed on the market.

      • Recently got into distilling….can confirm. Plus there was a kink in the Chinese supply line for parts, so lots of stuff on back order.

        The surf is extremely crowded too, surf shops likewise cleaned out of anything that gets the wind blowing through your hair.

    • I’ve heard every conspiracy theory under the sun on Covid, but is it a cover for TPTB to unleash the biggest MMT style stimulus as a last ditch effort to get the inflation they’ve been dreaming about since 2007?

      As per my comment above, some sectors are seeing huge demand for goods and services.

      • ‘Or supply chain disruption?’

        That has to be having an impact, no doubt. Then again we don’t hear Gerry Harvey whingeing so I suspect he might be flying at the moment.

    • I’ve noticed in my own hobby (vintage cars) things are actually surging in value… Despite all this madness… so yeah some things are increasing in price still.

      • Yeah but vintage cars ARE an asset.. So if you said “fed printed trillions and vintage cars increased in price”.. I can make a few hops to get there.
        This is a fkn iron. I am finding that hobbies that don’t double as assets are getting exxy… wtf is that. Stuff that shouldnt be getting more expensive are, in this environment.

        • I think there’s been a surge in demand for hobbies in general as people look for something to keep themselves or their kids occupied.

          Occasionally dabble in plastic model building and have noticed similar price increases. Having seen some of the distributor invoices, it appears that retailers get a 10% discount before adding their own margin – usually 100%. Currency fluctuations and increased shipping freight has seen pre margin price increase, meaning a basic kit that would be an impulse buy at $20-30 is now closer to $40-50. The higher end stuff has gone from about $3-400 to $5-600, but that’s for the hardcore who probably aren’t so price sensitive.

    • DominicMEMBER

      “I swear things look more expensive”

      Ahh, that would be the DEFLATION you’ve been warned about so often. (The nice economist said so, so it must be true).

      Take it from me, I’m an importer and things are much more expensive to import that a year or two ago. For starters, freight costs have gone through the roof — which does no favours to the unit cost of goods. And the exchange rate is not quite as favourable. Expect most consumer goods to continue to rise these next few years despite the central bankers imploring you to: Look at the CPI. The best result you can hope for is that the AUD heads to 0.80 (and higher) in the years ahead, but that will only mitigate the rise in prices, not make them cheaper.

        • DominicMEMBER

          I used a few in the past and then settled on one in Melbourne who was reasonably competitive and were always good to deal with.

          My understanding is that a lot of freight capacity has been withdrawn which has pushed up rates — added to which some of suppliers are based in areas of China that don’t have access to direct routes to Straya, so the containers have to transferred in Ningbo or other mainstream ports, making the shipping more expensive. But happy to get a competing quote …

    • Jumping jack flash

      We are due for some inflation. The RBA has been looking for it for years.

      Its a curious one though. I have no idea how things can possibly get more expensive in this environment but I have noticed it as well, especially in the “gougeables” of food and energy. It is interesting that discretionary items would be increasing in price too. Surely that simply means that people will simply buy less of them? I mean, fixed costs haven’t got much cheaper and wages haven’t got any higher, and the debt isn’t really growing.

      AfterPay effect perhaps?

      • Yeah i mean it comes down to price elasticity.
        You would think products that have substitutes like an overpriced iron.. would have high elasticity and the demand should drop… you cant really be a price setter..

  9. Jumping jack flash

    “According to APRA, $192 billion worth of mortgages have been deferred by Australia’s lenders”

    A little concerning but only represents about 2 years worth of interest payments out of the 30 year mortgages. Deferring is the right choice for the banks.

    Dont pretend you’re doing it tough, banks.

    Only a flesh wound.

    • ErmingtonPlumbingMEMBER

      As long as the down turn Is only for a year or 2 before the “snap back”.
      But where will they stand if no “Snap back” arrives for half a decade or more?

      • Jumping jack flash

        Agree this is the problem.

        The banks simply need to start lending bigger and faster than ever.
        The problem is debt eligibility, so solve it. It can’t be that difficult.

  10. Most of the comments are amusing schadenfreude. MMT means the government will never allow any really bearish outcomes to transpire. Obviously. 🙄

    • Jumping jack flash

      this.

      I hope for a crash as much as the next guy, but the reality is that there is no way that will be allowed to happen.
      My opinion is that we may see some downward trajectory in house prices for the next 6 months, or less, and then a new wave of debt, publicly or privately owned, it doesn’t really matter, will push everything up again.

      The important thing is that the debt exists and that it grows fast enough. It doesn’t matter how, or who.

      If the banks truly believed in their own system they would be lending out like there was no tomorrow. As long as the debt is used to attach to houses that then grow in enough value to cover any remaining P+I left over from the last pile of debt used to buy the same house (as well as some capital gains on top), there is absolutely no risk to the banks.

      • “But sooner or later struggling mortgage holders and loss-making landlords will be forced to face the music.”

        We’ve all heard that one before haven’t we? Don’t Buy Now…anyone?

        • Jumping jack flash

          Well, as soon as they solve this current debt eligibility problem the solution will be to simply flip to someone who is eligible for the correct amount of debt to set everything right again.

          And if that person gets into trouble then the next person steps up who is eligible for a pile of debt the correct size and shape to solve the problem.

          and on it goes.

          The problem though is debt eligibility. It can’t be that hard to solve. Come on government. Come on RBA.
          The government needs to start asking the banks the right question.

          Scotty needs to go to the banking cartel and ask them what will it take for people to become eligible for 5 million debt dollars each. And then the banks will tell him, and he can cut a deal, and then he can implement the plan, and then the banks can start handing out the debt.

          Its not that hard.

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