Aussie banks force distressed property investors to sell

Data from the Australian Prudential Regulation Authority (APRA) shows that banks have deferred 18% of small business loans worth $56 billion in response to the COVID-19 pandemic.

Morgan Stanley has warned that that many businesses in Melbourne that have been forced to shut down for a second time may never re-open, particularly smaller ones.

The APRA figures also show that more than 10% of home loan repayments, worth $192 billion, have been put on hold. Loans to investors account for 34% of home loan repayments that have been deferred, with banks already requiring some distressed investors to sell:

“There were some that would have been saying, ‘maybe I don’t need a deferral’, and now, bang, six weeks. So they’ll be going to their bank looking to defer their repayments,” [Peter Strong, the CEO of the Council of Small Business Organisations Australia] said…

Analysts at Morgan Stanley expressed similar concerns, flagging that the return to lockdown measures significantly increased business outlook uncertainty.

“Many that are being forced to close for a second time are likely to shut down the business for good. This is especially likely for less liquid small businesses.

“A higher rate of business closures will have long-lasting impacts on the economic recovery — increasing … longer-term unemployment and reducing economic capacity once lockdown measures are again removed,” they wrote in a note to clients…

A staggering 34 per cent of the home loan deferrals, meanwhile, were for investor loans, according to the figures from the regulator. Interest-only loans accounted for 14 per cent of the repayment holidays, while 8 per cent of deferrals went to mortgage holders with loan-to-value ratios of greater than 90 per cent.

The spike in investor deferrals could soon translate to a wave of distressed selling in the market, with anecdotal reports coming through that the banks are already pushing stressed property investors to reduce their holdings.

Martin North’s latest mortgage stress data showed that more than half of all property investors with a mortgage (one quarter of total investors) are suffering from negative cashflow, whereby holding costs outweigh rental income:

Of these 2.8 million entities, around 830,000 on a cash-flow basis, are not making sufficient to recover the costs of owning and letting their properties (stressed investors) of which 126,000 are severely stressed, most often because of low occupancy, or high repair costs. This is around 25.9% of all investment property, and 51.3% of mortgaged properties…

There is the clear risk of a feedback loop here, whereby falling prices causes investors to sell, which causes further price falls, etc.

Leith van Onselen

Comments

  1. darklydrawlMEMBER

    “There is the clear risk of a feedback loop here, whereby falling prices causes investors to sell, which causes further price falls”.
    Once that gets going prices can fall through the floor. Everyone knows they’ll be cheaper next month and puts off buying (and as a result prices fall) – rinse and repeat. That is how falls 50%-70% happen.

    • Was amazed at some of the gorgeous waterfront properties I saw in Florida that suffered an 80% hit in the US bust. Could never have imagined it, but psychology is a very strange beast.

    • elasticMEMBER

      Interest rate cuts have always been the mechanism to reverse the downwards momentum. Not available this time. The brake cable has been severed.
      They may need to rely on boosting immigration to eventually soak up the excess supply leading to higher rents and eventually a rebound in prices. But that is a mechanism that has an unknown timeframe and a delayed response.

  2. DominicMEMBER

    I feel distressed just thinking about it. Those poor ‘investors’. A taxpayer bailout is surely warranted.

  3. PaperRooDogMEMBER

    “A staggering 34 per cent of the home loan deferrals, meanwhile, were for investor loans, according to the figures from the regulator. Interest-only loans accounted for 14 per cent of the repayment holidays, while 8 per cent of deferrals went to mortgage holders with loan-to-value ratios of greater than 90 per cent.”

    Best news this year! Lets get this thing done & get back to being productive, banks lending for productive businesses & services not just to specufesters! We’ll be the envy of the world again in a decade, if we can just get over this dip with real change & without can kicking.

    • haroldusMEMBER

      if we can just get over this dip with real change & without can kicking

      I think I see a tiny flaw in you plan……..

      • PaperRooDogMEMBER

        Yep, I wouldn’t be surprised if it blows up like a security guards donga!

  4. Maybe it’s just getting started – everywhere?!
    “‘Unknown pneumonia’ deadlier than coronavirus sweeping Kazakhstan, Chinese embassy warns”

    • “Chinese embassy warns”.

      It may or may not be, but anything the CCP says should be actively mistrusted until independently verified.

      • kannigetMEMBER

        While I agree with you I can think of a few government officials closer to home that we should apply the same criteria to.

  5. ArasakaMEMBER

    I was told by people in the know that many of those on loan deferral are using that as an excuse to continue living like it’s 2019. When that finally ends, their new mortgage repayment amounts with the deferred interest tacked on is going to shove them over the edge of solvency, hard.

    I hadn’t realised that people were so thick. She’ll be right mate, I guess.

    • darklydrawlMEMBER

      I know a few people who are on deferrals – one of them is using to saved coin to move their business to a new premises. The loan is on an IP and the tenants have still paying the same rent so they are getting the same income with less outgoings for a few months. Not sure how the landlord gets away with that, but I guess no-one is actually doing much checking at the moment.

    • DominicMEMBER

      There is actually a scientific term for this phenomenon – continuing to live as you were even after financial circumstances deteriorate. Can’t recall the term but this phenomenon is commonplace.

  6. ashentegraMEMBER

    Decades of malinvestment in PPOR consumption assets and the Morrison government pulls the levers for MOAR!

  7. in majority of cases prices are still above money owed to banks so there is no point to go into official default – forced sale does the work

  8. Professor DemographyMEMBER

    Don’t worry. All the greatest minds of this Australian generation are working on this as we speak. I can assure you.

    • GlendaFMEMBER

      It’s not the greatest minds that worry me…it’s the stupid ones who are in charge that worry me!!!

  9. 25% distress for Vic – those are rookie numbers. Lockdown will bring those numbers up.