Time bomb? Thousands of Australian mortgages backed by virus benefits
SYDNEY (Reuters) – Nearly 20,000 Commonwealth Bank of Australia CBA.AX mortgages are held by people receiving benefits unemployed due to COVID-19, raising concerns about the economy of possible forced sales of properties and sharp declines in house prices once support runs out.
The data, released by the nation’s largest bank with the announcement of its annual profits on Wednesday, shows Australia’s $ 7.2 trillion housing market supported by temporary relief payments for those left unemployed by closures to prevent the spread of the virus.
This increases the risk of a sharp drop in house prices when payments stop and banks call for loans they have deferred for borrowers affected by the coronavirus. Already, the Australian government has extended COVID unemployment benefit by three months until December, at a reduced rate.
“It’s a real time bomb,” said Richard Holden, professor of economics at the University of New South Wales.
“One of the tricky things for banks is how aggressive they are going to be in applying for loans.”
About 1.3 million Australians have applied for the COVID jobless allowance, called JobSeeker, according to government figures, while economists estimate at least 6 million more people – a quarter of the population – are seeing their wages subsidized by a separate relief program for closed businesses.
CBA, which owns a quarter of Australia’s home loans, said it currently has deferrals on around 135,000 mortgages, or 8% of its portfolio. Of these deferred loans, 14% involved borrowers receiving benefits from JobSeeker and almost half of that number had no other source of income to help them.
“If a lot of them were forced to sell, it would have a noticeable impact on the market,” said David Bassanese, chief economist at BetaShares Exchange Traded Funds.
“If you have desperate sellers or forced sales, it could have a depressing effect on prices. That’s the big risk: do (the banks) continue to differ? Someone has to pay for this.
RISK OF HIGH HOUSING RETURN
The ABC, which said house prices could drop nearly a third by the end of 2022, said it was reaching out to all customers with deferred mortgages to discuss options such as returning full or partial payment or the conversion of their loans into interest only.
“The postponements … have provided clearly significant support and flexibility for clients,” ABC CEO Matt Comyn said on an analyst call.
“The test will be how efficiently we can make the orderly transition away from deferral of repayments,” he added.
Prime Minister Scott Morrison has said he plans to continue offering a COVID-specific form of unemployment payment after the current deadline.
A housing slowdown could hurt the economy further, with the pandemic plunging the country into recession for the first time since 1991.
For now, house prices have remained relatively unchanged, with nationwide prices falling by around 1% overall in May and June, although they still rose by almost 8% from the year before, according to real estate consultant CoreLogic. [reut.rs/2XUZBDY]
Nationwide auction close-out rates are around two-thirds, down from around three-quarters a year earlier, but higher than in other recent declines.
“We expect a drop, but we don’t expect such a drop,” said Janu Chan, senior economist at St George Bank.
“You still have some kind of supports and there is also the possibility that we can get more.”
Reporting by Byron Kaye, with additional reporting by Paulina Duran; Edited by Shri Navaratnam