Victorian mortgage holders feeling the pinch

A third of Victorian mortgage holders were experiencing mortgage stress – and then along came a global pandemic. But for those able to withstand the worst of the economic fall-out induced by the pandemic, there are some variables that offer hope.

Victorian mortgage holders feeling the pinch
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Seemingly a lifetime ago, in economic terms at least, research released around new year showed an alarming 32.9 percent of mortgage-holding Victorians were in mortgage stress.

The economy was relatively strong, property prices were surging towards record levels and a virus only kept you off work for a couple of days.

Forward to late April and our new world order has been turned upside-down, putting lives, careers and family homes at stake.

With the jobless rate expected to double to around 10 per cent because of shutdowns in place to fight the coronavirus crisis, the number of Australians struggling to repay their mortgages is expected to lift to levels higher than those seen during the global financial crisis (GFC).

Credit rating agency S&P Global has warned the number of Australians falling behind on their mortgage repayments is likely to soar, with the self-employed expected to be among the hardest hit.

The same banks that were bailed out by taxpayers after the GFC have been berated by the Federal Government for being too slow to grant bridging finance to businesses waiting for the $130bn JobKeeper payments to begin, fuelling the problem.

Dr Sam Tsiaplias, Senior Research Fellow at The University of Melbourne’s Melbourne Institute: Applied Economic & Social Research, said mortgage stress could only worsen for Victorians.

“With rising unemployment and significantly weaker economic conditions, there is little doubt mortgage stress will rise,” he said.

“To some extent, this will be ameliorated by banks offering customers temporary mortgage relief, as defaults are not beneficial for borrowers or banks.

“The major source of uncertainty is what happens at the end of the six-month period of mortgage relief - if the economy hasn't recovered, we may be in a situation where banks have to extend mortgage relief or see mortgage stress increase significantly,” he said.


Double whammy

Exacerbating the problem of unemployment driving up mortgage stress is the additional blow of falling prices for those forced to surrender the family home, or even an investment property that had served as a vital source of income or potential retirement security.

In Melbourne, asking prices were dropped on 13 per cent of listings in March, compared with just 3 per cent late last year.

These early signs suggest a broader market slowdown is anticipated as vendors seek a timely sale in fear of what may be ahead.

A domain report found a 20 per cent drop in new listings in the four weeks to mid-April compared with last year, as social distancing restrictions that banned open homes and auctions slowed buyer activity, and consumer sentiment plunged.

Cate Bakos, President of The Real Estate Buyers Agents Association of Australia (REBAA), identified the upper quartile price points and holiday houses as the areas most at risk.

“Those in financial distress will always sell a holiday house before they’ll sell a home, and for those exposed to large debt against the family home in the top quartile price points, the option to downsize may be the only one to get through this, particularly if business vulnerability is high too,” Ms Bakos said.

Dr Tsiaplias said the burden was falling most heavily on the young.

“Financial stress during COVID-19 is not evenly distributed across demographic groups - younger households, in particular, are more likely to experience stress than older households.

“House prices and rents are no doubt a relevant factor, with a significant proportion of younger households being renters.

“As such, areas with relatively higher proportions of younger households tend to be more at risk in terms of financial stress,” he said.

Cushions could soften fall

For those able to withstand the worst of the economic fall-out induced by the pandemic, there are some variables that offer hope.

“Those whose incomes have since been impacted by COVID-19 will most certainly be experiencing heightened mortgage stress, but it is important to note that those still in full employment (at the same pay scale) will have experienced an easing in mortgage stress for two reasons,” Ms Bakos said.

“Firstly, we have had significant rate cuts, with the RBA’s cash rate falling from 0.75% to 0.25% in the space of two weeks in March.

“Lenders have broadly passed on the cuts and the impact on interest charged to consumers is huge.

“Secondly, the relaxation of ASIC’s responsible lending guidelines means many consumers have been able to shift from principal and interest to interest-only during this period.

“Lenders are well aware of financial hardship and many are making it easier for customers to hold their properties through this difficult time,” she said.


Time to buy?

For first-home buyers with secure employment, cheaper properties under $250,000 are appearing in the COVID-19 affected market. Ms Bakos said the reduced prices could provide an opportunity for first-time buyers to enter the market if they timed their purchase correctly.

“Those who are in stable jobs should consider the positives of being able to buy with reduced competition.

“When green shoots stimulate more buyers to jump back in, the conditions will get tough for first-home buyers again.”

Dr Tsiaplias said they still had time on their side.

“It probably makes sense to exercise caution right now as house price growth will be relatively weak in the short-term, so I don't think FOMO (fear of missing out) should be a major concern.”

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