Housing prices could spiral as 15 per cent struggle to resume mortgage repayments

About 15 per cent of people who deferred their mortgages are at risk of not being able to resume repayments, according to the nation’s central bank, possibly leading to a sell-off of homes at a loss and a ‘housing fall’. 

Australia has generally dealt with the financial fallout of the COVID-19 pandemic resiliently, the Reserve Bank of Australia (RBA) has said, but the economic forecast is uncertain and “substantial risks” remain.

The bank’s Financial Stability Review, a biannual report assessing the state of the financial system and the risks to its stability, found about 15 per cent of mortgage holders who deferred repayments will likely not be able to resume them. 

“Some borrowers may be able to restructure their debt (such as by extending the term or temporarily switching to interest-only payments) and lower their repayments,” the RBA said.

“However, some borrowers may need to sell their property to repay their debt.”

The Australian Banking Association revealed more than 900,000 people had deferred their personal and business mortgage repayments, as of September -- indicating about 135,000 people would struggle to resume their repayments.

Banks are currently contacting 450,000 mortgage holders to discuss their options and resume repayments. 

A small percentage of people on a mortgage holiday are expected to be in arrears if the unemployment rate hits a projected 10 per cent, the RBA said. It estimates about 2 per cent of all deferrals -- approximately 18,000 -- would default on their loans. This is double the current average, they said.

High unemployment, due mortgages and falling JobSeeker

An increase in distressed sales could lead to the housing market experiencing a fall.

“If many borrowers were to attempt to sell because they are unable to meet their repayments, and demand is weak, housing prices could fall,” the RBA said.

“Large and sustained price falls could lead to losses for borrowers and lenders.” 

Housing prices have fallen for the last five months, according to analysts CoreLogic, anchored by falls in Melbourne and Sydney. The typical home lost about $12,500 since the beginning of the year, according to the Australian Bureau of Statistics. 

National housing prices remain 1.5 per cent below the April 2020 peak, the RBA said.

The fall in housing values has contributed to about 3 per cent of loans having negative equity; that is, having a mortgage that is higher than the value of their property.

“The share of all loans in negative equity would roughly double if prices were to fall by a further 10 per cent,” the RBA said, “and for a 20 per cent decline, the share would increase seven-fold.”

If house prices were to continue to fall then, there is a potential scenario where selling them would not cover the debt.

Loans currently in negative equity are mostly in Queensland, Western Australia and the Northern Territory, the RBA said, where some regions had large housing price falls during the unwinding of the mining investment boom.

Economists have walked back projections of 10 to 15 per cent falls in the housing market following containment of the virus, however the possibility of a second wave remains. 

Property investor sales could ‘exacerbate housing price falls’

A health measure instituted to help prevent the spread of COVID-19 is particularly impacting property investors, who may sell off their investments in large enough numbers to further exacerbate a fall in housing prices.

Closed borders and travel restrictions have led to a fall in tourists, international students and migrants, cutting off a large group of people who would typically rent properties from investors.

An estimated 31,000 overseas migrants are expected for the financial year ending in 2021, according to CoreLogic. This represents a fall from 232,000 compared to the previous year.

Most of these migrants would’ve rented properties in Sydney or Melbourne, and their absence has contributed to an increase in rental vacancies in the two cities. 

“Extended periods of vacancies could lead to mortgaged investors struggling to afford repayments, and deciding to sell their properties,” the RBA said.

“This has the potential to exacerbate housing price falls, particularly in areas with more investor properties.”

The rental consumer price index fell in the June quarter for the first time in the 48 years records have been kept, according to the RBA, a phenomenon that it said took place because of rental reducations and cheaper rental listings.

Newly built investment properties 

Years before the coronavirus, planning and development began on tens-of-thousands of apartment buildings in the nation’s largest cities. 

More than 50,000 units were under construction in NSW and more than 45,000 were being built in Victoria as of the end of March, according to the ABS.

And many of these are about to be put up for sale in an economic environment already grappling with oversupply and weak demand, the RBA said.

“For newly completed apartments, sales are now being settled in very different economic conditions,” they said. 

“While there is little evidence of higher settlement failures to date, risks are elevated given the economic uncertainty and potential for further price declines.”

The National Housing Finance and Investment Corporation (NHFIC) claims the drop in demand for rental properties has proven so severe that from 129,000 to 232,000 fewer apartments, townhouses and houses could be developed within the next three years.

Building approvals are on the decline, according to data from the ABS. The number of apartments, townhouses and houses approved for development dropped by 1.6 per cent to 13,691 in the month of August. Offsetting a rise of 4 per cent in freestanding homes was a drop of 11 per cent in apartments, villas and townhouses. 

“Large falls in underlying dwelling demand, particularly due to substantial falls in international students, are already putting upward pressure on vacancy rates and downward pressure on rents in inner city suburbs,” NHFIC said.

“If sustained, this could cause a contraction in construction activity that will add to the recessionary forces that are impacting the economy.”

Compare home loans in Australia