Will Aussie property plunge off mortgage cliff?

CoreLogic’s head of research, Eliza Owen, believes concerns surrounding the ‘mortgage cliff’ are exaggerated:

COVID-19 exacerbates the risk that high housing debt has to the Australian economy. In the March quarter, the ratio of household debt to annualised household disposable income sat at near-record highs of 142.0%.

With widespread unemployment, there is increased likelihood borrowers could fall behind on mortgage repayments, with the potential to generate forced sales. This in turn could increase the supply of listings, and put further downward pressure on dwelling values.

Many banks offered a pause on mortgage repayments early in the pandemic to reduce this risk. As of June 2020, the value of housing loans deferred was $195 billion, or 11% of total housing loans.

These ‘mortgage holidays’ are temporary, and were initially in place for 6 months from March 2020. This led to concerns over a ‘September cliff’, where mortgage holiday repayments and fiscal support policies would be repealed as the economy was yet to recover.

However, it is important to remember that no entity has an interest in seeing residential mortgages fall off a ‘cliff’ come September. Residential mortgage lending accounts for about 60% of bank lending. Housing accounts for about 53% of household wealth, and the accumulation of wealth in housing eases pressure on the government to fund Australians in retirement.

Thus, it is unsurprising to see that both banks and statutory authorities are looking to extend repayment deferrals where it is needed. In a letter to banks, APRA advised that for loan repayment deferrals provided prior to September 30 2020, ADIs could continue to apply a ‘temporary capital treatment’ to a total deferral period of 10 months, or up to the end of March 2021. The ‘temporary capital treatment’ means that APRA does not count a deferred loan as in arrears, or as restructured.

Interestingly, of this deferred volume, only 8% had a loan-to-value ratio of more than 90%. In addition to the national property price upswing of 8.9% between July 2019 and April 2020, it likely that relatively few of the borrowers deferring their mortgage repayments are in a negative equity position.

This is important, as recent research from the RBA has highlighted that foreclosure on mortgages is far less likely when the borrower is in a positive equity position.

It is also worth keeping in perspective that not every Australian has the same level of risk when it comes to housing and debt. For example, around 30% of Australian households own their home without a mortgage. RBA research suggests that over 50% of loans had prepayments of at least 3 months, and about 30% of loans had prepayments of at least 3 years.  However, this is not to say parts of the market are without risk.

The same data set showed just under one third of mortgage holders had less than one month of prepayment, and that this group with low repayment buffers were more likely to experience financial stress.

The markets more likely to see a dangerous combination of negative equity and mortgage arrears have recently been mining regions, such as the north western region of WA.

More recently, there is evidence to suggest more severe price falls and disruptions to loan repayments could occur across inner-city apartment markets of Melbourne, and potentially Sydney.

Eliza Owen may end up proven right. However, there are good reasons to be concerned.

First, the ending of mortgage repayment holidays will more or less coincide with the unwinding of emergency income support (e.g. JobKeeper), early superannuation withdrawals, and the temporary moratorium on insolvencies. Thus, there is the potential for a large number of forced sales driving property prices lower.

Second, the risk is greatest for highly leveraged, negatively geared landlords in Melbourne and Sydney. These markets are most exposed to the collapse in immigration, and both property prices and rents are already falling.

According to Martin North’s latest mortgage stress survey, one quarter of property investors (around 50% with a mortgage), were cash flow negative in August:

As shown above, a significant share of landlords in NSW (33.8%) and VIC (24.9%) are experiencing mortgage stress, with 7.9% in NSW and 3.3% in VIC experiencing “severe stress”.

With property investors experiencing both falling income and wealth, many will be heavily incentivised to cut their losses and sell.

This, for me, is the key risk facing the Aussie property market in 2021.

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

    • Serge UpwardsMEMBER

      Perhaps so….

      With property investors experiencing both falling income and wealth, many will be heavily incentivised to cut their losses and sell.

      Absent savvy property investors and the arrival of ‘New Australians’, who is going to do all the snapping up of properties ?

      Well, in these current circumstances it may have been forgotten that people under stress and pressure often ‘snap’, they lose it and do really stupid things.

      A new dawn approaches.

        • I was once like you: no entity, no property. Now I am grey and as impotent as that parliamentary inquiry into Crown Casino that never got off the ground… But if I could offer you one advice, it would be this: don’t wait for the mortgage cliff. Borrow now as much as the bank allows and make a generous offer to secure your dream home. It doesn’t matter what you pay today, it won’t make a difference in a decade or two.

          • No offence Tezza, but thanks for the same advice you have proffered on almost every mortgage/housing blog post on this site in the last 2 months.

            “When you buying a home, son?” “I don’t know when”
            But we’ll get together then, dad
            We’re gonna have a good time then (in April ’21!)

            It’s not time to make a change
            Just relax, take it easy

  1. “…and the accumulation of wealth in housing eases pressure on the government to fund Australians in retirement.”

    There it is… the COVID’s the thing
    Wherein I’ll catch the conscience of the King.

  2. The banks wont give struggling owners or investors a free ride for ever. They need the repayments to restart otherwise they will have broader financial issues. They are in self preservation made of not going too hard on repayments now but knowing they will need to tighten the screws over time. They want to avoid a mass rush for the door causing LVR downgrades and negative equity.

  3. This in turn could increase the supply of listings, and put further downward pressure on dwelling values.

    This. Everyone forgets about the supply side. If policy makers can avoid widespread forced sales (and they can) the ‘crash’ will be a non-event. Again.

  4. However, it is important to remember that no entity has an interest in seeing residential mortgages fall off a ‘cliff’ come September.

    Idiotic woman. I’m an entity, and that’s what I’m interested in.

  5. Poochie the Rockin DogMEMBER

    I think she’s right the banks won’t let housing crash when that’s the majority of their capital. The high house prices aren’t even going to make people who don’t own housing feel worse, in fact it’ll give meaning to their lives – an achievement that one can look back on in death and say I did it, I really made something of my life – I bought a house in Sydney

      • Poochie the Rockin DogMEMBER

        The magic pudding is the RBA recently handing them 200 billion and there will be more of that to come in the future, banks can defer mortgages for the next 5 years if they wanted to

    • Narapoia451MEMBER

      I’m sure the banks in Ireland wouldn’t let housing crash either, or Spain, or the US…
      Still see no reason to think that the halfwits in charge of Aus banking have powers that escape their international peers – to be the first to prevent a bubble unwinding.

    • Saying banks won’t foreclose to keep prices high is like saying you won’t walk to the exit door in a fire in case of causing panic. If it were true ASIC would not need to put pressure on lenders to stop foreclosures. Long term non performing loans are the fire for banks and they will get rid of them unless government/regulators intervene. ATM intervene means pretending there’s no non performing loans .

  6. These people aren’t in trouble because of LVR ratios, they are in trouble because of LTI ratios. 9x LTI is a disaster even in good times with both couple working. 1 looses a job and you in big trouble.

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