One-third of property investor mortgages in danger of default

The Australian Prudential Regulatory Authority (APRA) released some alarming data late last week on mortgage deferrals.

According to APRA, $192 billion of mortgages have been deferred by authorised deposit-taking institutions (ADIs), comprising 11% of all housing loans:

Worse, more than one-third of investor mortgages have been deferred, a large proportion of which are interest-only:

As reported earlier this month by Martin North, one quarter of property investors (more than half with a mortgage) are suffering negative cash flow on their investment. That is, their holding costs are greater than their investment property 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…

This alarming data has prompted ANZ’s group executive of retail and commercial banking, Mark Hand, to advise struggling borrowers to sell:

“The growth that you might have anticipated might not come, so at some stage you’re going to have to say: ‘If I can’t afford this mortgage, am I better off to rent, put my capital aside and wait until I’m in a better position to buy back into the market?’”…

“Some of those customers, I think, will say ‘I just can’t see how I can trade my way out of this,’ and will be wise enough to cut their losses”…

That is wise advice. But it also increases the rise of a feedback loop, where falling prices causes more investors to sell, which causes further price falls, etc.

Leith van Onselen
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Comments

  1. Strange EconomicsMEMBER

    No worries, negative gearing will save them. Sell? NEVER !

    Since when is property supposed to be positive geared when govt guaranteed 10% a year capital growth.

    And Budget Day surprise – massive negative gearing cost of billions..SpeculatorKeeper anyone? so no money for Jobseekers

    • kannigetMEMBER

      can only write off to NG what you pay in tax, and only the taxable portion, if your that far underwater NG aint gonna save ya

  2. SnappedUpSavvyMEMBER

    just have to let the virus rip so the population ponzi can start back up and save house prices, its all that matters

    • Reus's largeMEMBER

      I am pretty sure that this is the plan, I think that was the plan from the beginning but public opinion got the better of them

      • SnappedUpSavvyMEMBER

        yep, and no one needs the population ponzi more then Daniel Andrews, hmmmmmm

  3. 1/3 of 11% is around 4% of property investors, or 1 in 25 mortgages. How did you arrive at “one-third of property investors”?

    • Sorry. Poor choice of words by me. I meant to say: “more than one-third of investor mortgages have been deferred, a large proportion of which are interest-only”.

      The post has been updated.

    • Jumping jack flash

      Very interesting thanks.
      Not surprising at all. This is a global problem of too much debt and not enough debt growth to sustain the debt.

    • Reus's largeMEMBER

      Perfect example of when the financially illiterate fall for the hype and buy into property, this is what is going to blow up big time and destroy lives, and all was totally avoidable.

    • Not a shot at you Samson, but it is funny how in this country the wording is – Maria “owns” an investment property on interest only.

      • It’s a great point. We use “own” to mean the equity position as opposed to the lender. We haven’t had a recession for so long folks forget that equity in a securitisation deal is also called “first loss”.

      • Good point. You are either a finacial renter, from the bank or a property renter from the landlord. Serfdom eitherway

      • “Maria had beed paying it off on an interest-only loan.” This clearly seems to contradict the usual meaning of the phrase “paying off a loan”. Although, I’m not sure what other phrase I would have used instead – perhaps: “Maria had been servicing the mortgage on the property with an interest-only loan” (?)

  4. Jumping jack flash

    The banks need to trust the amazing system they created for creating debt infinitely. What are they trying to prove? We all know how it works.

    So long as they keep enough debt flowing to the people to attach to the houses there won’t be any risk at all. LVR will continue to be in fantastic shape. They won’t even need to go to weird and amazing lengths such as inter-generational debt, and all the rest as some people may think they may need to.

    These loan deferments aren’t an issue at all. This is the new normal.

    It doesn’t really matter if the debt isn’t completely repaid in a single lifetime of working, that’s the Old Economy’s standards and rules. As long as the next buyer is given enough debt to cover the remaining interest and principal of the last mortgage, and provide the seller with the expected amount of capital gains, that’s all that matters. At the end of the mortgage term when the property is sold, all the debt and interest is recovered because enough new debt is created to ensure it.

    Theoretically nobody needs to make any mortgage repayments at all. When the house is sold, enough new debt is created by the banks to ensure the banks are all good.

    It is time to rewrite the rules around debt for the New Economy. Its all about the growth, the capital gains, the instant untold riches with no effort, and providing enough new debt to make sure everything remains working.

    • I work with a guy that is ex big 4 bank and he thinks that from the banks perspective the deferrals of loans are great as they are growing their loan book in otherwise tough times for new business.

      • Jumping jack flash

        Of course. It is actually more desirable for the banks if principal isn’t repaid. It turns into a nice little cash cow to be milked for a constant stream of interest.

    • Legislate home value increases. No loan repayments are needed if house values automatically increase to cover the payments and keep the banks’ balance sheets in the black.

      • Jumping jack flash

        No need to legislate, the banks just make it happen, it is in their best interests.
        It basically happens that way now, but the banks aren’t trusting their own model and debt has frozen up. The debt freeze obviously exacerbates the problem of inadequate debt growth.

  5. China PlateMEMBER

    But on the other (Mark) Hand the ASX is up so all good.
    Mark that down to nothing to see here

  6. Display NameMEMBER

    Just extend the term to 90-100 years . We just need to keep pretending.Nothing to see here. Kick the can.

  7. nexus789MEMBER

    The feedback loop has already started. Aside from investors Boomers in large properties will start to sell as they see the their retirement nest egg starting to diminish in value. Like lemming off a cliff.

    • DominicMEMBER

      If the younger generations end up poorer than their parents and many cannot get on the ladder, who will the Boomers sell their crazily expensive homes to?

  8. ‘If I can’t afford this mortgage, am I better off to rent, put my capital aside and wait until I’m in a better position to buy back into the market?’”
    Great advice – we sold in 2017, invested the equity in Nucleus Wealth and happily rent. We spend the savings on popcorn and ski trips. We’ll buy back in if the market tanks, if it doesn’t we’re happy to keep renting although moving sucks at end of lease but small price to pay.

    • Jumping jack flash

      This comment by the bank is very telling. It is what is not said that is important.

      If house prices truly were doubling every 7-10 years then a bank saying something like this would be absurd. How can it be possible to buy back into such a market after getting out? It is already nearly impossible to even save a deposit. Obviously banks think that something very nasty is on the way…

      Or maybe they are just soothsaying so these poor twits don’t top themselves.

      • Agree. Can’t recall hearing the ‘we’re Australia we’re different to Ireland’ narrative for a while. At least ANZ are on record with a warning to the property doubles every 7 years crew

      • There was a realestate dot com news article a couple of weeks ago that was very quickly pulled down again, about multiple bank execs listing their million dollar properties for sale. I was very surprised it slipped out in the first place, not surprised it was removed.

        The banks don’t want property values to collapse but if they are falling anyway, they will want to limit their bank’s exposure to the riskiest mortgages and push some sales or refinancing to other providers (which anecdotally was already starting for multiple property investors).

        • Nah. Here it is.. https://www.realestate.com.au/news/commonwealth-bank-exec-scott-wharton-joins-list-of-bankers-listing-their-sydney-mansions/
          Surely there are these many bankers selling on any given day but it is an interesting spin on it..
          ——-
          Scott Wharton, part of the executive leadership team at the Commonwealth Bank, is quietly shopping his $9 million Bellevue Hill mansion around through Double Bay real estate agents.
          It’s understood Wharton has taken on board the predictions of his bank’s economists that there are COVID-19-related price drops ahead for the property market — of between 11 and 32 per cent — over the next two years.
          He’s aiming to capitalise now while there’s very little competition and intends to buy again later in the year or early next year when he believes prices will be cheaper.
          —–
          I swear there are lot more spruiks about vendor selling frenzy. Maybe when they replaced journalists with muppets they forgot to tell them which side is demand which is supply… spruiking the wrong side now that it is the only activity left in the market.

    • AirtourerMEMBER

      Ditto us Bungle. Except Oct 2018. Very happy with the position and with Nucleus performance.