SYDNEY, Dec 20 (Reuters) – Australia’s post-pandemic housing market slump will intensify over the next year as hundreds of billions of dollars in mortgage debt, which was set at record-low rates in 2020 and 2021, mature and borrowers do too forcing them to refinance at punitively high interest rates.
Home loan repayments of an estimated A$370 billion (US$245.79 billion) could rise by as much as two-thirds while real incomes are already contracting on the back of rising inflation, dealing a severe blow to house prices and the economy’s main engine growth – consumer spending.
Property values in Sydney are down 12% so far this year and Eliza Owen, head of Australian research at property consultancy CoreLogic, expects further losses as more distressed properties come up for sale.
“Although most borrowers are expected to continue servicing their mortgages, there could be more motivated selling if mortgage arrears rise from a record low,” Owen said.
Homeowner Francesca Lemon knows the pain – repayments on her adjustable rate mortgage have already risen by A$1,200 a month this year, forcing her to return to work despite a long-standing illness so her family can keep up with the debt .
“It’s very frustrating and people are already struggling to survive. The cost of paying your mortgage adds thousands of dollars to literally everyone,” said Lemon, 31.
Australia’s big four banks – Commonwealth Bank of Australia (CBA.AX), Westpac (WBC.AX), National Australia Bank (NAB.AX) and ANZ (ANZ.AX) – account for 75% of the country’s mortgage market.
The Reserve Bank of Australia (RBA) has hiked interest rates every month since May, taking them from an all-time low of 0.1% to a decade high of 3.1%.
Policymakers are all too aware that mortgage payments will soar to record highs next year as fixed-rate lending expires, and cited this as one reason they became the first major central bank to slow the pace of tightening. Continue reading
The RBA worries that cash flows from 15% of adjustable rate borrowers could turn negative, assuming interest rates rise to 3.6% in line with market expectations.
‘DAMN HARD’
Lemon managed to get a lower interest rate from another lender over the past month, helped by a surge in competitive refinancing demand. Yet those who bought at the top of the market could well slip into negative equity and have no choice but to sell.
Buyer’s agent Lloyd Edge says some cautious mortgageholders have sold before their fixed-rate loans expire.
“I think there will be a lot of other people where this will be the situation but they don’t realize it yet.”
Hundreds of thousands of Australians have taken advantage of extremely low interest rates during the COVID pandemic to enter one of the world’s least affordable housing markets.
Fixed-rate loans — typically two- or three-year maturities — accounted for over 40% of new lending during COVID, up from 15% previously.
The rate hikes already implemented will add about A$1,000 to the monthly repayment of the average A$600,000 mortgage, a deadweight blow for a population holding A$2 trillion (US$1.3 trillion) in home equity debt.
Thanks to savings buffers built up by the COVID pandemic, severe stress tests on loan applications and the usual two to three month delay for rate hikes to filter through to the economy, there has yet to be any material rise in mortgage arrears.
However, surveys are showing signs of borrower stress, with consumer confidence at lows typically seen only during recessions. Research firm Roy Morgan estimates that one in four mortgage holders will be at financial risk by January.
Leesa Gasparin, a 55-year-old Tasmanian resident, now contributes a quarter of her monthly income of about $4,000 to her mounting mortgage.
“I know it probably isn’t a lot of money for some people, but for me it is. It’s like everything with groceries, electricity and all that. It’s really damn hard.”
($1 = 1.5053 Australian Dollars)
Reporting by Stella Qiu and editing by Muralikumar Anantharaman
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