Coronavirus crisis job losses will raise mortgage stress more than the GFC did: analysts

Coronavirus crisis job losses will raise mortgage stress more than the GFC did: analysts

Updated

March 27, 2020 17:04:13


Photo:

Mortgage stress is expected to rise as more Australians lose their jobs. (Alistair Kroie.)

As job losses continue to rise because of shutdowns in place to fight the coronavirus crisis, the number of Australians struggling to repay their mortgages is expected to lift to higher levels than seen during the global financial crisis.

Key points:

Australia avoided mass defaults during the GFC but one analyst says that may not be the case this timeA NAB economist says the unemployment rate will leap to 12 per cent, despite stimulus measuresAnother analyst predicts 1.5 million Australians could soon be in mortgage stress and some will default on loans

Credit rating agency S&P Global has warned the number of Australians falling behind on their mortgage repayments is likely to soar.

“We currently expect increases in arrears to be higher than during the 2008 global financial crisis, given the wide-ranging effects on the economy stemming from the sudden disruption to economic activity,” S&P analyst Erin Kitson said.

“Arrears will also rise much sooner than they did during the financial crisis.”

Australia avoided mass defaults during the GFC, with mortgage arrears rising to 1.69 per cent after the 2008 crisis, from a pre-crisis average of about 1.40 per cent.

The latest S&P data said mortgage arrears were 1.36 per cent in January, up from 1.28 per cent last December.

Ms Kitson could not put a number on the exact number of Australian households that would be impacted by arrears but noted that many of those facing difficulty would be the self-employed.

“Self-employed borrowers in direct client facing businesses — particularly in the tourism, leisure and hospitality sectors — are most exposed to the sudden disruption to economic activity,” she said.

But the Federal Government’s stimulus packages and hardship relief measures from banks would limit some of the damage, Ms Kitson added.

Unemployment rate could hit 12pc by mid-year

To fight the economic threat, the Government will announce a third stimulus package, expected within days.

Many banks have also recently announced COVID-19 support packages that provide affected borrowers with an option to defer their repayments for up to six months.

And regulator, the Australian Prudential Regulation Authority (APRA), has said if a borrower who has been meeting their repayment obligations until recently chooses to take up the repayment holiday, then the bank need not classify that period as “arrears”.

Other emergency measures aimed at banks include an emergency interest rate cut and $90 billion in cheap 0.25-per-cent funding for three years for small business loans.

NAB chef economist Alan Oster said all these measures would still not stop Australia’s unemployment rising sharply, to hit about 12 per cent by mid-year.

The situation was “very fluid”, but a loss of about 5 per cent in GDP seen in countries offshore, “may well occur in Australia”.

“While we appreciate that both monetary and fiscal policy have responded strongly and will likely respond further, these actions are unlikely to fully offset the short-term impact of the large economic shock under way,” he said.

And major adjustments to household and business balance sheets could also trigger a house price crash and see a slower recovery.

“A more significant adjustment in house prices or an increase in household stress triggered by job losses poses the risk of a larger correction in housing construction and sharper falls in house prices,” Mr Oster said.

Even with strong growth in 2021 the unemployment rate by end-2021 could still have a 7 in front of it, he said.

“Importantly, this scenario would not see the level of GDP return to its-pre-pandemic level until end-2021.”

Mortgage stress and defaults could rise

One property market sceptic warns that soon more than 1.5 million Australians could face mortgage stress and some may end up defaulting on their home loans.

Digital Finance Analytics’ Martin North, who analyses data from household surveys to predict where mortgage defaults could end up, said about 32 per cent of people with mortgage were already struggling.

He has predicted mortgage stress will jump to about 38 per cent as unemployment soars to 7 per cent or more.

This translates to an additional 250,000 households in mortgage stress, on top of 1.08 million households already in mortgage stress.

But now Mr North believes that figure could worsen in the coming months.

“I wouldn’t be surprised to see over 40 per cent of households in mortgage stress, which would take that figure up to about 1.5 to 1.6 million households in mortgage stress,” Mr North said.

While many define mortgage stress as spending more than 30 per cent of your pre-tax income on home-loan repayments, Mr North points out that his definition is based on a household’s actual incomings and outgoings.

“We look at money in and money out — have you got enough money to meet all your spending needs, including your mortgage repayments?” he said.

Mr North said he had been closely monitoring delinquency rates in Western Australia over the past five years, and Australia’s eastern states could soon face the same fate, with more defaults.

He said under a 38 per cent mortgage stress scenario, there could be more than 82,000 people risking default.

Under a 40 per cent mortgage stress scenario, there was a risk that more than 200,000 could default, although the actual reported number may be lower because of the repayment holidays not being treated as defaults by APRA.

“I’m not saying they are going into default immediately, but this is an early indicator of trouble ahead,” Mr North said.

“People will be given some latitude from banks so they may not have to declare them as defaults.”

Big banks ‘redemption’ moment

ANZ chief executive Shayne Elliott said on Thursday the way banks handled customers affected by the coronavirus crisis could be a redemption moment for the major lenders.


Photo:

ANZ CEO Shayne Elliott said the way banks handle the customers affected by the coronavirus crisis could be a redemption moment for the major lenders. (ABC: John Gunn)

“We’re going to be judged, like we are every day, not on what we say … but what we actually do,” he told ABC News Melbourne.

“We have a real opportunity to stand up and be seen to play our role in what is going to be a very, very difficult time.”

Mr Elliott agreed that the banks would make “life or death” decisions for many businesses and households, but there was limits to what they could do.

“We have highly leveraged balance sheets because of the nature of what we do, and we’ve got depositors to look after too,” he said.

“So we have masses of capacity, but it’s not limitless.

“We have to make difficult choices as a community and as the banks about who do we support first, and what is the nature of that support?”

On Friday loan comparison website RateCity said home loan interest rates had plunged to as low as 2.09 per cent, with some banks lifting their short-term savings rates to as high as 2.65 per cent for new customers.

“It’s hard to believe we’re seeing savings rates that are higher than some fixed home loan rates, even if they are only for a short time,” RateCity.com.au research director Sally Tindall said.

Your questions on coronavirus answered:

Topics:

business-economics-and-finance,

money-and-monetary-policy,

small-business,

economic-trends,

globalisation—economy,

work,

self-employment,

disease-control,

health,

diseases-and-disorders,

federal-government,

politics-and-government,

australia

First posted

March 27, 2020 16:03:10

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