Australia’s mortgage time bomb rigged to blow

Earlier this month, the Australian Prudential Regulatory Authority (APRA) released data confirming that just under half a million borrowers had deferred repayments on $192 billion worth of mortgages:

These mortgage deferrals comprise 11% of all housing loans, according to APRA, with around on-third of property investors with mortgages taking advantage of the repayment holidays:

A new survey from RateCity suggests that more than one-quarter of borrowers with a deferred mortgage will not be able resume repayments once holidays end, with a similar proportion claiming they will consider selling their home:

Come September, when the six-month mortgage deferral period ends, only those in severe financial hardship can apply for a four month extension. The others will have to resume repayments…

Of those who had [deferred repayments], 28 per cent say they won’t be able to or don’t know if they’ll be able to resume their repayments.

Weighing their options, 67 per cent say they hope their bank will give them an extension, 25 per cent may switch to interest only repayments.

Another 25 per cent will consider selling their home, 17 per cent will look at borrowing money from family, and eight per cent may rent out their home and live somewhere cheaper…

The Australian Banking Association says the four-month extension will not be automatic and will be reserved only for those in severe hardship…

RateCity research director Sally Tindall says there is a lot of uncertainty around the end of the initial six-month deferral period.

“Lots of people are unsure what they’ll do and that’s a worry,” she said.

The Australian economy and property market are currently existing in an artificial bubble, propped up by mortgage repayment holidays and emergency income support.

Even with these supports, nearly 1.5 million owner occupied mortgage holders were experiencing severe financial pressure in June, according to Digital Finance Analytics:

The story is even worse for investors where DFA’s mortgage stress data shows “a larger number of property investors with a mortgage (51.3%) are underwater from a cash-flow perspective… which suggests investors are caught in the financial crisis headlights”:

Both mortgage repayment holidays and emergency income support will be tapered down from October. This will place households under even more severe financial pressure and potentially lead to a wave of forced property sales.

Leith van Onselen
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Comments

  1. Anecdata is most people I am speaking to are still being granted extensions, banks going easy on them… for now. Appears hard word is slowly starting to be put on those in hardship prior to C19, and those with non-C19 situations unlikely to improve. One guy- retired in Sydney on a defined gov pension, can no longer afford mortgage due to increase in medical/living costs, no other assets/income, tried to sell early 2020, all offers under mortgage amount (?), bank has said get it sold or they will.

    • I’m in a pickle – cash in bank, renting, want to buy – roof over family’s heads, 30 YR proposition – timing the bottom sounds good, but…..

      Mind you I’m in a region with a less-terrible forecast, albeit large swathes of surrounding LGAs are on JK.

      What to do, what to do. I’m feeling a bit Gavin.

      • Swampy I’m the same as you, my area doesn’t look like going down much (it’s Canberra so steady employment, especially in my area which is well to do, mostly owner occupiers, and also includes a lot of retirees who have paid off the house and aren’t under pressure).

        I can see opportunities to get a small discount due to uncertainty / nerves but I think a large fall isn’t on the cards here so I’m not waiting, I’ll buy if the right property appears. That said I’m not rushing either, has to be the right place.

        Once I buy, half of MB is awaiting the next leg down of the crash triggered by me 😁 but that crash will be in Sydney and Melbourne.

          • And mostly I am very dubious about this data set. Canberra suburbs and postcode areas are very small. In my area the volume of sales has been tiny, and the number of properties with an advertised price (rather than auction and then “price withheld” is smaller still. So I’m not sure about the utility of the data set. But it does match my own market tracking in 2605 at least in terms of direction: ie strong in Jan-Feb, very soft in March – May, and back to stronger now.

          • PalimpsestMEMBER

            One of the interesting Martin North assessments was the holding of IP’s that were underwater and where the owners lived. Some of the Canberra higher income suburbs featured. The reasoning is that the professional and higher wealth group own more investment property than average, and have therefore come under more stress than expected. Their own homes are fine, but may have been used for leverage downstream and so there may be unexpected blowback.

        • I would very much like to know why people think that a collapsed economy like Greece, Spain, Ireland – wherever – with a government in so much debt it can barely function seems like a reasonable scenario. But when the Australian government goes even further into debt – than almost any country in all of history – things will be fine and the government will just magic a recovery ?

          Here’s the deal – our housing crash will take down the government with it. People need to get that basic, really simple maths through their heads.

          The first place where there will be tsunami of houses is going to be Canberra as every single PR, spin doctor, assistant, EA, advisor, within 30 degrees of separation to a Ministers secretary will be getting the flick.

          Spell it out with me peoples – AUSTERITY.

          Its coming, get used to it – its not a choice – its mandated from above.

          • Because Greece and Spain don’t control their own currency and don’t control their own interest rates.
            Whereas we can make AUD and AUD debt whenever we want.

            Not saying it’s good. But I am saying it’s what they’re doing.

          • All the PR flacks and spin doctors and advisors don’t live here in Canberra. They would never stoop so low. They fly in when parliament is sitting from places like Syd and Melb and fly out again afterwards. Taxis and ubers, and Serviced apartments and hotels will be hurting but not suburban houses.

          • I’m a Canberran and think you should wait. The good suburbs will take a while but we were as hooked on the immigrant real estate crack as much as anywhere. God I hope it hurts Barr.

          • Nick1970MEMBER

            What Arrow said mate – we control our currency. Surely they will trash the dollar to clear the nominal debts.

        • You’re right about the sqm asking price data. Not many sales, so a single good/bad sale can bias things badly. On the other hand, there’s not too much else to go on, so I give it a little bit of credence.

          It’s like political polling though, the only one that counts is on election day, and the only price that matters is what you eventually hand over for the roof over your head.

          • Yep true all of that.

            I think the SQM data is probably a useful source of intel on the direction, if not the magnitude of price moves.

      • Did you watch the Martin North/Edwin Almeida live stream last night? Edwin is very bearish. But I reckon if you’re serious about buying try to find the argument for prices going up. I haven’t sat down and seriously thought it through but I need cos I want to go regional. My thinking atm is the regionscan only sustainably go up, and go up by a lot, if enough people in the big cities can sell their place at a high enough price that they have equity left over to but something else, possibly in cash. Anyway Edwin had lots of nuggets on info on the nitty gritty of markets that I thought was helpful to a property noob, which I am.

        Other than that giving Martin north USD 50 per month for all of his mortgage stress data could well be a worthwhile investment for a few months to help you make the property purchase decision

          • There’s obviously a cascade of purchases that occur to keep the market functioning. I think any prospective buyer needs to understand what that is and then try to understand different permutations of effects when it seizes up. Thanks for your comment, it helps

      • Well last holidays I visited the north east and what I saw was classic Boomer la la land behaviour. Those millionaire boomer hippies are (I am guessing) IP’d to the eyeballs. They are FANG’ed to the eyeballs.

        Nowhere is going to be protected from this route. And I bet they said the same for the same reasons about Arizona, Florida and Nevada. Look what happened there.

      • You might be able to look at it this way: Sep/Oct cliff is not too far away.

        Hence, if you don’t need to buy now, or don’t have an irresistible opportunity, then maybe wait a bit?

        Or, you can jump in like Gav and I, and herald the certain end of the Great Aussie Property Bubble 😉

        • This is true, but we are mentally and socially and educationally invested in this village, very tightly held . If something comes up before Sept/Oct,can’t wait, lest we be renting for much longer.

      • Swampy, I wouldn’t buy now.
        House prices are dependent on mass third world immigration program and employment ,,, both are buggered for a long time.
        There are still a great deal of temporary immigrants that arrived here before the virus and are supporting housing and services industries.
        The government has said they expect immigration to fall to about 30,000 next year and jobkeeper is funded to march, so prices will theoretically have huge downward pressure middle of next year,

    • My guess is banks have no choice now. The Gov is buying them time but more and more people will be forced to sell. Controlled crash.
      Next round JK and JS will be slashed further and that will push prices even lower. Anyone with half brain is selling now – if they haven’t sold yet.

    • Banks don’t want to slit their own throats. Too many forced sales will impact the capital value sitting under their mortgage books. All crazy systemic…

    • J, but the interest keeps piling up in the loan……there may be extensions, but the problem isn’t going away and they all know it as the home statements come in each month.

        • Jumping jack flash

          No QE, and to a lesser extent no negative interest rates, may make this a bit tricky for them, but certainly not impossible.

          100 billion of interest every year paid by the government? I’m down with that.

          The government has managed to stump up 300 billion pretty quickly in “emergency stimulus” in the name of the virus, so what’s an extra 100 billion every year for the best part of the next 30 years? I’m sure everyone will be ok with the size of the government debt at the end of that little spree, especially with no QE allowed.

          Tax cuts only work if you’re actually paying tax.

          • If house prices fall 30% banks will be going to the wall. Government will be bankrupt and forced into austerity.

            People seriously aren’t even bothering to think about debt any more – its been solved because reasons.

            It has not. Our private debt threatened to collapse our economy – but we were ok because government debt was reasonably contained – not government debt is reaching private debt – its done.

            There will be no “largess” – people need to understand this, get it through their thick skulls. We are not a global creditor – we are a debtor nation.

            Why people can’t understand this is beyond me.

      • Is not the interest capitalised into the loan balance, and therefore this has a feedback loop making the serviceability look worse and worse? Or do they extend the mortgage term as well ie a 25 year remaining that is extended/paused for 9 months goes out to 26 so the servicing looks better.

        • Currently in some hardship arrangements if banks need to they can rejig the payments/duration of loan to re capitalise and delay the inevitable- borrower usually has to manage on an agreed probation repayment at a lower amount and demonstrate that they can service this and have some plan to get out of the mess & not go bankrupt etc during this time. I guess if everyone that was well into their 30yr mortgage (Xyrs of Sydney mega growth and equity in place for example) was allowed to blow it back out to 30yrs and just pay a token probation amount for year or two the can could be kicked Pele-esque down the road with minimal forced sales and price drops?

          • This.
            A friend of mine is a credit analyst for a big 4 bank here in Brisbane and said that the banks will bend over backwards to come to an arrangement with the homeowner – extend and pretend – the cases where the borrower is an addict or gambler and can’t or won’t help themselves then they will foreclose but the process in some cases can take a year or more.

          • What happens to personal super in bankruptcy? I am thinking that get your super and pay back mum and dad (6 month rule?) and buy stuff for cash (from mum) with unpaid mortgage money.

          • Display NameMEMBER

            @simben13

            That approach will work until and if the unwind becomes disorderly. Might not. Then again it is hard to pick. It will depend on an element of FONGO being generated and as they say; you go broke slowly at first, then very fast.

          • Australian banks have $2.3 Trillion in private debt on the books – $1.7 trillion owed to foreign markets backed by mortgage securities. What do banks tell their lenders ? No worries, a few weeks well get it right back. And what about LVR ratios for a million dollar mortgage on a house now worth $600k ? A person without a job ? What do they tell the ratings agencies, lenders, financial markets ?

            People are just behaving as though there is no consequence to not repaying loans – “its just a bank – they don’t even need to be repaid”.

            Honestly its like people have lost their minds on this.

            Australia is going to get dragged out onto the international financial markets gallows and pushed straight through the trap door with a 6 loop knot.

  2. I am surprised listings are not going through the roof. People still thinking it will go away before Christmas.. just a flue and we will get our jobs back.

    • I typed a typically well considered response but due to the continued lack of fixing the spam bot issue for paying subscribers….

      Anyway.

      Try again.

      Spoke to a local branch manager. Some local towns. Coastal, hinterland, northern rivers. 50% housing stock owned outright in them, the rest are LVRs down around 30%. Who is being forced to sell in those instances?

      I keep saying this, but sure some will have to sell, but plenty won’t. Plenty will just not list. Or, they’ll sell as they are smart and are GTFO. Or they want to move. PLenty will extend and pretend on refi – loans dot come dot au 1.99 intro rate reverting to 2.59 and 2.29 2YR reverting to similar.

      I’m not saying a particular area is different (some are though), but there’re so many variables at play.

      I’m also surprised at local prices. I pasted about 4 places that are super high IMV but that probably tripped the spam bot.

      Here’s one
      https://www.realestate.com.au/property-house-nsw-boat harbour-134000130

      • I get your point but you also need to take in consideration Bank Of Mom & Dad – many paid off properties are collateral so stress builds. Not many will be sold by the banks but it will impact spending patterns even by those that are supposed to be with money. Flow on effect is fewer jobs and more pain.

      • How is the address of that Boat Harbour? Miles from the ocean.

        Reiterate other comments. That is a nice house but sheesh there’s not much around and it is still relatively close to neighbours etc. It’s a rainforest version of goanna country. Not much you can do on that block beyond a kitchen garden.

      • So the average age of the households must be 55 years. I don’t trust the intel from yon banker. If he had that much equity sitting on his patch and could sucker it out of those boomers he would have been sacked year ago.

        • Not necessarily

          No comment on your other points

          Just relaying what I was told
          Another big 4 lender indicated no concern about a large number of postcodes here. Either woefully ill informed or genuinely not concerned?

      • Doesn’t matter what your LVR is – if you have lost your job through Covid you are forced to sell when job keeper ends.

        Thats it – 205 of the work force.

        Another 60% of the workforce has taken a pay cut – thats huge. The number of people with varied repayments is the only stat that matters – not your anecdata sorry to say. It really is irrelevant.

        And once they all realise, and they all start selling – prices will drop 60%. Their LVR ratios will suddenly double – worse.

        • Is there a way to derisk an offer? STF of course. I suppose when it comes time to settle if not sooner maybe before exchange you have a quiet word to the bank about lower vals then go back and say sorry bank thinks it’s worth 10% less.

          We basically had the buyer for ours have his finance cut by 60k (!!) in 5 months so he borrowed money from family to get ours

    • MB posters do.

      “Just don’t pay your loan back – it doesn’t matter – banks don’t even need the money” – seems to be the vibe.

      Worse – “Government needs to do major stimulus with infrastructure spending and revive manufacturing” – reality – government is broke, massive debt already – in coming austerity.

  3. Random question – I live in Paddington NSW, the good old 2021. In a victorian 1880s terrace that has been reno’d etc. It’s a great walkable suburb – my commute to the city is a ~30 minute walk down oxford street to my office which is down the town hall end of the city.

    I am not that familiar with other capital cities. What would a similar suburb be in Brissy, Mexico DF (Melbourne), Perth etc. This interest was piqued after Ermo wondered what Ermington was in Perth ….

  4. Keep away from Dark City dirty Melbourne, carlton is horrible as in fitzroy. I owned in Paddo/woolahra. Was an extreme walker there and in Northbridge Sydney and best of Perth, not in Melbourne.

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