Deferrals Mask Covid’s True Hit on Mortgage Arrears

Australian mortgage arrears are expected to increase nationwide in coming months as rising unemployment flows through onto debt serviceability.

Standard & Poor Global Ratings says the hit of Covid-19 will be further revealed in the fourth quarter of 2020, with mortgage arrear rises more likely to be more pronounced in Victoria and areas where tourism is a major employer.

The credit rating agency forecasts that property prices could fall 10 per cent from the onset of the pandemic, and that arrears are likely to vary by state and territory, reflecting different economic recovery paths.

“We expect arrears to begin surfacing in the second half of 2020, and losses to emerge in 2021,” S&P analyst Erin Kitson said.

“Strong growth in property prices could return, underpinned by increased demand when international borders reopen, low-interest rates and potential supply shortages.”

Capital Economics this week maintained its own forecast that house prices across the eight capital cities will eventually fall by 8 per cent from their peak, due to expected rising unemployment and weaker consumer confidence.

Weighing in, AMP Capital chief economist Shane Oliver advised home prices could fall by around 10 per cent to 15 per cent from the April high.

Covid-19 hardship spots

AreaStateExposure total RMBSExposure COVID-19 loansProportional increase
Sydney - Inner South WestNSW3.31%4.37%32%
Gold CoastQLD3.13%4.21%35%
Melbourne - South EastVIC2.5%3.21%28%
Melbourne - North EastVIC2.5%3.25%30%
Sunshine CoastQLD1.55%1.88%21%
Melbourne - North WestVIC1.3%1.65%27%
Mornington PeninsulaVIC1.27%1.93%52%
Sydney - Outer South WestNSW1.03%1.25%21%
Richmond - TweedNSW0.97%1.33%37%
Sydney - South WestNSW0.89%1.31%47%

^ Data as at June. 30, 2020. Residential mortgage-backed securities. Source: S&P Global Ratings.

Fiscal stimulus measures are helping many borrowers whose income has been impacted by the pandemic.

S&P says mortgage payment deferrals are masking Covid-19’s true effect on arrears.

“This is because most lenders are not including loans under Covid-19 hardship arrangements in their traditional arrears reporting during mortgage-relief periods.”

New South Wales has managed to keep its economy open, for the most part, and stayed on top of localised virus clusters.

S&P says managing this will be crucial in keeping the economy open, preserving jobs and restoring the state’s strong arrears track record.

Victoria’s stage four lockdown will restrict its path to economic recovery, affecting employment, housing markets, and debt serviceability.

S&P says the state is likely to see the largest increase in mortgage arrears above pre-Covid-19 levels.

Arrears were already higher in Queensland, which S&P attributes to its exposure to mining and drought-affected regions.

“With the Covid-19 pandemic, tourism hotspots are struggling from the closure of international and some state borders.

“Tourist towns have a disproportionate share of loans under Covid-19 hardship arrangements and will likely see higher arrears in the months ahead,” Kitson said.

Western Australia has had the nation’s highest arrears for a number of years due to pressures since the end of the mining boom, S&P says.

“Covid-19’s economic effect is unlikely to be as negative as other parts of the country, given its good progress on containing the virus and the strong demand for iron ore. Longer-dated arrears meanwhile will still weigh on overall arrears performance.”

The 10 worst-performing postcodes

StateSuburb and PostcodeLoans in arrearsLoan count
WAByford 61226.28%430
VICGreenvale 30595.94%390
WAMaddington 61095.92%273
NTDarwin 8005.36%266
WABlythewood 62085.34%258
NSWChester Hill 21624.91%327
WACooloongup 61684.83%583
WAButler 60364.82%371
WACloverdale 61054.69%427
VICSouth Melbourne 32054.68%330

^ Source: S&P Global Ratings. Data as of June 30, 2020

Australia's four major banks—ANZ, CBA, NAB, and Westpac— reported increases in non-performing ratios, highlighting the impact of Covid-19 on asset quality.

Moody’s Investors Service says the big four banks’ profitability will be under pressure due to a combination of a slowdown in credit growth, and high credit provisions.

“Deterioration of asset quality and profitability will weigh on capital,” Moody’s Investors Service vice president Daniel Yu said.

Covid-19 hardship arrangements and concessions peaked in June.

S&P says several lenders reported falls in July when most parts of Australia reopened their economies.

Figures released Wednesday revealed gross domestic product fell by 7 per cent in the June quarter, the largest quarterly fall in GDP on record, and a bigger drop than the 6 per cent fall the market had forecast.

Household consumption dropped 12.1 per cent in the quarter. The fall in consumption, which makes up around 60 per cent of GDP, was led by a 17.6 per cent fall in spending on services for the quarter due to restrictions in place to contain the spread of Covid-19.

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