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Australia Mortgage Defaults Due to Income Loss, Negative Equity

Australia Mortgage Defaults Due to Income Loss, Negative Equity

Australian mortgage defaults are chiefly due to a change in earnings, resulting in homeowners unable to meet monthly repayments, or when their property is worth less than their loan, according to research from the central bank.

“Since unemployment spells and reductions to income appear to be the key macroeconomic drivers of arrears, the unemployment rate and net income should be considered key variables when evaluating financial stability risks and in setting stabilizing macroeconomic policy,” the Reserve Bank of Australia’s Michelle Bergmann said Wednesday.

The main role played by housing prices is where a borrower already facing an ability-to-pay shock becomes more likely to enter foreclosure if they have negative equity, according to the report.

Australia’s big banks gave households some breathing room earlier this month when they announced hard-pressed borrowers will be granted a further four months before they have to start repaying their loans. About 10% of mortgages and a further 15% of small business loans are currently on pause, and some 800,000 Australians would have seen such support withdrawn from the end of September without the extension.

The government on Tuesday said it will pump a further A$20 billion ($14.3 billion) into supporting the nation’s jobs market, extending by six months its signature wage subsidy program, albeit at a lower rate, which is currently supporting about 3.5 million workers.

As the coronavirus pummels Australia’s economy, the jobless rate climbed to a 22-year high of 7.4% in June. However, taking into account people who have left the workforce or are on zero hours, the effective unemployment rate is at 11.3%, Treasurer Josh Frydenberg said yesterday.

According to the RBA’s report, prolonged periods of negative equity may in themselves increase foreclosures “as borrowers face a baseline probability of experiencing an idiosyncratic shock, such as illness.”

While this suggests that policies aimed at lowering loan-to-valuation ratios can be useful in reducing the probability that borrowers experience negative equity, this must also be weighed against the costs of tightening credit supply, she said.

©2020 Bloomberg L.P.