The great mortgage extend and pretend

The latest Australian Prudential Regulatory Authority (APRA) data on mortgage repayment deferrals revealed that $195 billion of mortgages have been deferred by around 500,000 Australian households, accounting for 11% of total outstanding mortgage debt:

Moreover, around one-third of investor mortgages have been deferred, according to APRA:

With the September deadline on the resumption of mortgage repayments fast approaching, Australia’s banks are unsure about how they should deal with the large pool of potentially delinquent mortgages.

This deadline significantly raises the risk of a sharp downturn in Australian property prices if/when the banks call in loans they deferred for COVID-impacted borrowers.

Economists and the banks rightfully are worried:

“It’s a real timebomb,” said Richard Holden, an economics professor at University of New South Wales.

“One of the tricky things for the banks is how aggressive they’re going to be in enforcing loans”…

“If many of those were forced to sell, it would have a notable impact on the market,” said David Bassanese, chief economist at BetaShares Exchange Traded Funds.

“If you’ve got desperate sellers or forced sales, it could have a depressing effect on prices. That is the big risk: do (banks) keep deferring? Someone’s got to pay for this”…

“Deferrals … have provided obviously significant support and flexibility for customers,” CBA Chief Executive Officer Matt Comyn said on an analyst call.

“The test is going to be how effectively we can make the orderly transition away from repayment deferrals,” he added.

This comes as more than one-third of Sydney home owners are reportedly paying mortgages they cannot afford:

Across the city, there were just over 20,000 homeowners owing over $1 million on their mortgages, according to the study by Digital Finance Analytics…

Roughly 26,000 NSW homeowners were now at risk of defaulting on their loans, while 38 per cent were “mortgage stressed”, the research based on more than 50,000 household surveys revealed.

“We have a debt problem,” Mr North said. “It’s been building for years but now the tide is out and we can see it more. It’s going to look really ugly in the next year.

“A lot of people will be questioning if taking on this much debt was a good idea. I suspect many bought thinking prices would keep growing.”

Enter the Australian Securities and Investments Commission (ASIC), which yesterday issued guidance notifying lenders that they could extend mortgage relief to customers “to keep them in their homes”:

Lenders must do all things necessary to ensure that the credit activities authorised by their licence are engaged in efficiently, honestly and fairly. As such, we expect lenders to have processes in place that will allow for an orderly transition and importantly, deliver consumers appropriate and fair outcomes…

Some lenders have raised queries with ASIC about how to approach situations where they identify that a consumer’s financial difficulties are so severe that they will not be able to repay their loan over the longer-term. ASIC expects lenders to make all reasonable efforts to work with consumers to keep them in their homes if that is in their best interests.

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, “more than 1.5 million households [are] in mortgage stress, rental stress is up, and property investor stress is up”, according to Digital Finance Analytics:

Extending mortgage repayment relief will delay D-Day. But eventually the property market, banks and mortgage holders must face the music.

Leith van Onselen
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Comments

  1. In an era when nobody has to bear the consequences of anything, the resolution to this emerging situation will be fascinating.

    I’m betting on wholesale govt support for the market, MMT-style.

    • This is what concerns me about the idea of MMT most. Are we going to bail out the reckless? What does that tell Australians at large about responsibility? Or is the idea that people shouldn’t be fiscally responsible, that they need to borrow and spend as much as possible because that provides money to businesses and therefore keeps the economy moving round?

      • Reckless…. hmmm, you can argue in the weeds about this, as it’s subjective, but I would say if people were buying whilst considering this type of risk, no one would have been buying (ok, not no one but you get my drift)

        I’m not defending million dollar mortgages, mind, I’m just saying.

        • I tend to think that when taking out a 30 year mortgage, both banks and borrowers should presume that serious issues are going to occur in that time period. Instead we’ve had banks throwing credit around like confetti to borrowers at their max borrowing limits.
          There is no longer any buffer for IRs to be dropped further in a downturn, so the banks really need to start exercising some prudence with their lending as recommended by the soon forgotten royal commission. Problem is that without credit growth it’s near impossible to generate economic growth.

        • OK. I see your point about about people maybe not being as reckless as seems. Well, in terms of homeowners anyway, I’m not sure I’m willing to extend that to you average property investor.

          It just seems that if property investors get bailed out then Australians will consider property a “sure thing” again, with all the negative consequences that comes with that.

          • Yeah. I think that is why ASIC has been specific about keeping people in their homes.. i.e. ensuring that banks have the green light to gas the investors without them being able to cry “unfair”.

        • If you have a home loan, an investment loan or an other loan, you really need to have enough buffer to survive a year or two without income. If you don’t have that, then yes I would say your borrowing was reckless or risky and as such you get what is coming.

          This is regardless of the price of the asset. Doesn’t matter if the house was $1m or $100k.

          • The average income is$70k a year.
            How many people have that sitting in around when that’s not even keeping up with inflation?

        • “Million dollar mortgages”?

          That’s every mortgage these days.

          People don’t even blink when shitty houses in shitty neighborhoods are listed at a mil.

          This will end in tears.

      • Arthur Schopenhauer

        1. Yes.
        2. Borrow all you can. Lie if you have too. Access to credit is real wealth.
        3. Yes.
        /sarc

        Seriously, it’s becoming more of a moral problem than an economic problem.

    • +1 @revert2mean
      Interesting Analyst question to NAB CEO on 3Q results today… went something like: given the pain being shouldered by a wide cross section of community (i.e. business, employees, tenants, landlords, retirees, Dan Andrews), will the banks consider writing off some of the interest payments deferred in this period? As I heard the response. No

      • Some cheerful quotes from NAB CEO:

        “NAB Chief Executive Ross McEwan said some customers hit by the coronavirus pandemic should consider selling before prices fall.

        “Every reasonable step will be taken to keep people at homes,” McEwan told reporters in the call.

        “But we all know that there will be some circumstances where people are better off selling out early and taking some equity out of their homes or keeping some equity before it disappears.”

        The former boss of Royal Bank of Scotland added, “We’ve seen that in other crises around the world when people try to hold on and end up walking away with nothing.”

        https://au.investing.com/news/stock-market-news/australias-nab-urges-highrisk-clients-to-sell-homes-soon-2185655

          • Me, for instance. I’m looking to move to a smaller property (8 acres is too much), but prices are so absurd now that I’m just sitting on my hands.

          • I was going past an open home today and decided to pop in.

            At least 15 cars and multiple groups of older well healed types. That house will sell fast.

            Everything else is going up fast

        • Yeah I saw that pop up in my feed. These are big words coming from a CEO of one of the big 4.
          He didn’t even bother sugar coating it. He was basically admitting his loan book is horrible and it would be great if we are the first ones out the door.

    • How do you see this playing out – Bailing out home mortgage holders indefinitely, buying distressed assets above market value or owning the bank with the dodgy asset book?

      The 1st 2 options would see the PM’s head on a stake in the street when non asset holders get screwed. The 3rd is already underway with the RBA buying RMBS but that doesn’t bail out the individual.

      • Honestly, I don’t know. But you can bet that Recessionberg and Scotty from Marketing are thinking about this …. a lot.

        • They’re really not.
          They will stick to their gaslighting by saying “this is why we are working on jobs and tax cuts to make that easier”.
          What are you going to do? Vote Labour instead? Exactly. Noone would be dumb enough to think Labour would be better for house prices.
          So scummo is safe even if housing fails on his watch. Only need to ensure that the developers gave beeb bailed out already to be ready to buy blocks on the cheap.

    • MMT in AUD would require Chyna to continue t buy over priced iron ore in current quantities, or the dollar would suffer to the extent that the benefits desired will not happen.

      • My understanding of MMT is that it does not require a healthy balance of payments to work

        • Would you sell stuff and be happy to be paid with Zimbabwe or Venezuelan currency?
          I think that is what you are asking.

  2. SnappedUpSavvyMEMBER

    20,000 households with million plus mortgages just in Sydney
    Wow 😮 that’s a lot of fckn savvy

  3. There’s that word ‘orderly’ again, so long as they can keep trickle feeding properties onto the market and keep it orderly, then there’s no problem….

    • So ‘orderly’ is about confidence. Confidence in being able to sell when and at the price that property religion deems appropriate.

      Every survey on confidence is waning or outright collapsing. Many will be crushed going for the exit.

      • Unless we have a successful vaccine soon, in which case “market rebound” where everything gets “snapped up” at “rock bottom prices”

        • But then again…
          Covid-19 Shaping Up to Be Battle for Years Even With Vaccine

          (Bloomberg) — The coronavirus pandemic is likely to be a challenge for years to come even with a vaccine, according to pharmaceutical and public-health experts.

          While a vaccine will provide some measure of protection to societies around the globe, the virus is likely to flare up from time to time and be constantly battled, much like the flu and other pathogens.

          “We know this virus is not going away any time soon. It’s established itself and is going to keep on transmitting wherever it’s able to do so,” Soumya Swaminathan, chief scientist for the World Health Organization, at the “How Covid-19 Is Reshaping the Global Healthcare Ecosystem” event hosted by Bloomberg Prognosis. “We know we have to live with this.”

          Humanity’s record against viruses is poor. Only one virus has been fully driven out of existence in humans – smallpox. The rest are managed, with brushfires stomped out when they flare up.

          “I think what’s realistic to expect is that with a combination of drugs and vaccines we can get to a stable place where the pandemic is manageable,” said Novartis Chief Executive Officer Vas Narasimhan. He called the actual elimination of the virus “unlikely.”

    • The hoards were happy to step on everyone on the way up. It will be a bloodbath and every man, woman and their dog for themselves on the way down.

  4. Wow, just wow…!

    “RBA governor Philip Lowe has veered off into fantasyland in evidence to a parliamentary inquiry this morning.

    Asked by LNP MP Ted O’Brien if Australia’s households should pay down their debts – which are extremely high – or spend money to stimulate the covid-ravaged economy,

    Lowe said they should do both.

    And that they could.

    “Well, I want them to do both,” Lowe said.

    “And I think they can do both.”

    He said that at the moment households were using government support to pay down their debts.

    But “if our income growth is strong enough we can both spend and pay down our debt,” he said.

    Unfortunately for Lowe, he had just told the committee that there would be no real wages growth in the economy for the next several years.

    Thanks in large part to our outrageously high house prices, Australia’s households are also some of the most indebted in the developed world, on average owing around twice as much as their yearly disposable income.

    The source for that figure? Lowe’s own RBA.”

    • Display NameMEMBER

      And those high propety prices kill shops with excessive rents, renters via the same, and discretionary spending. No part of the economy escapes being clobbered by excessive debt.

        • Drapht ay? Love the Hilltoppers too.

          Got my man from Detroit on the wireless atm – Moodymann. Check out his DJ-Kicks mix

          • Shall do

            Been a bit of methodman (early 2000s steezy Forum snowboard movies style), Sublime and Brand New and Soundgarden this arvo

            #codingtunes

            You like Murs?

          • Swampy, spent a year over in Canada in ‘02-03. Sublime’s self titled album was the soundtrack to the year. Soundgarden goes back to my high school years. Chris Cornell say no more. Not massive into Wu Tang but like a good method man spat. Haven’t heard of Murs? Just chucked him on. Was a bit rude for the missus lol! I’ll give him a proper spin on the way to work 👍🏿

          • Oh and Batter Up is my favourite Brand New tune. Again, not big into them but they are good

    • Arthur Schopenhauer

      “… on AVERAGE owing around twice as much as their yearly disposable income…”
      That average word hides a multitude of sins. Especially as 1/3 of households rent and 1/3 of households own their primary residence.

    • RN this afternoon reporting the govt is exhorting all who have jobs have a duty to spend baby spend

  5. I mentioned this earlier but Asic won’t matter if Apra is enforcing capital adequacy on deferred loans (there is currently a covid honeymoon).

    More importantly – or worryingly – RMBS doesn’t have the facility for deferral – I am not sure how the banks are treating those loans – no payment will mean default on many tranches of RMBS ….

    • that is to say capital required is 3% on a regular loan, say $3k on a $100k loan but anything in arrears shoots up to 100% capital required pretty quickly – $3k to $100k capital – the banks can’t get this (although apra could just ignore it – I am not sure for how long tho – won’t ‘investors’ start leaving the stock in droves if the real capital isn’t there?

      • But a bank can’t lose 100% of the mortgage – the property has to be worth something, let alone any equity in it.

        So eventually, the banks will force sales or restructure the loan (which also helps the capital).

    • Who pays for the debit side of that accounting entry?
      The govt who refuses to keep job seeker and job keeper going or the govt that only provides housing stimulus to the developers?

  6. Only 11% of the total outstanding housing loan value has been deferred.

    Immaterial to the RE market.

    Even if all of that 11% was forced to sell (extremely unlikely), it’d be “snapped up” straight away. It’s not difficult to understand the RE market in Australia. You just need to take off your blinkers and look at it from all angles.

    Chinese proxies are still buying in the major cities and the sellers are still buying and pushing prices up in regional and coastal areas with their winnings. Covid hasn’t stopped it.

  7. “$195 billion of mortgages have been deferred by around 500,000 Australian households”

    I’ve missed out on this party – thats $65K a month per household

    • What’s $65k a month? The average deferral is a mortgage of $390k. At 3.4% interest rate that’s a deferrals of about $1,000 a month of interest.

      • are they deferring interest only or principle and interest?
        i think Bruce divided 195 billion on 500k

          • Arthur Schopenhauer

            It depends. Some moved to IO, and some on a repayments pause with interest accruing. The latter case is becoming less feasible by the week.

  8. Well here in Perth just got a letter from the council informing us that a house across the road will be demolished to build 3 dog box units. The letter came because the developer applied for significant exemptions from planning laws some of which will put the front doors of the units 1 step from the footpath. Have not seen any slow down in Perth real-estate.

  9. Well that’s how big bubble pop.
    Each and every year the next person has bought at the top and maxed out their LTI at 7-9x in order to do it.
    At any given point in time your always going to have a large portion of people right on the edge of a crash.
    And so when the blow off top happens all those people that have bought last get wiped out.
    The people that bought the previous years panic and try to sell ASAP and will take a slight discount to get out forcing the price down. Each and every person that gets taken out is suddenly removed form the market and not a buyer like when people trade up houses in good times taking on more leverage.