The Financial Strain Behind Rapid Home Resales in Australia
New data reveals that a significant portion of home sales in Australia is driven not by prosperity, but by financial distress. According to CoreLogic, a record 16% of property sales early this year involved homes that had changed hands within just three years. While this could indicate a vibrant market benefiting from house-flipping investors, the reality appears far more complex and sombre.
The Shadow of Mortgage Hardship
Eliza Owen from CoreLogic pinpoints mortgage hardship as a critical factor behind these short-term resales. “Where we’ve seen a rise in short-term resales, it’s probably a combo of mortgage stress and big capital gain windfalls,” she explains. But is there evidence to support this assertion? Data from the Australian Securities and Investments Commission (ASIC) suggests so.
Last week, ASIC published a report exposing numerous deficiencies in how banks handle customers undergoing financial hardship. Buried within this report was alarming data indicating a burgeoning mortgage crisis in Australia. Over the final three months of 2023, mortgage hardship notices lodged with banks surged by 54% compared to the same period in 2022.
The Growing Tide of Hardship Notices
A hardship notice is filed when a borrower informs their lender of their inability to meet the terms of their credit contract. In 2023 alone, 30 of Australia’s largest lenders recorded over 444,000 hardship notices linked to nearly 300,000 accounts. Of these, approximately 40%, or more than 116,000, were related to home loans, with the majority concerning owner-occupier loans.
Given that the survey included reduced income, unemployment, medical issues, separation, bereavement, business failure, parental leave, abuse, natural disaster, and other categories, it’s hard not to conclude that banks simply lent too much money to a large group of people without factoring in sufficient buffers for rising interest rates.
Regulatory Oversight and Lending Standards
It’s not surprising that banks did this, nor is it surprising that regulators are reluctant to admit it. This situation stems from a rule change by the banking regulator APRA in 2019, which removed a 7% interest rate floor on mortgage serviceability tests for home loan applicants. As rates fell leading up to and during the pandemic, along with the RBA’s extraordinary stimulus measures, the repayment buffers that prospective borrowers were expected to demonstrate decreased accordingly.
Considering that APRA, ASIC, and the RBA all sit on the Council of Financial Regulators, which oversees financial stability, it’s little wonder they are reluctant to acknowledge that many Australians were simply lent too much between 2020 and 2021. Admitting this would mean conceding that they erred in lowering lending standards in 2019, a decision influenced by public requests from both the Morrison government and some of the big banks to ease restrictions on home loans.
‘Distressed’ Sales at Lows Despite Rising Hardship
It’s important to note that during the review period, more than half the hardship notices related to home loans that had been open for more than five years. It makes sense that older loans account for a large share of hardship, as enough time has passed for many otherwise sound borrowers to encounter one of life’s many potential misfortunes.
However, there is a sizeable group who were already in trouble less than three years into their mortgage. This is the group highlighted by CoreLogic’s data, selling voluntarily before their hand is forced by their lender. Thanks to generally rising property prices, most can get out without foreclosure or bankruptcy. That’s probably why Domain’s index of “distressed listings” remains low. It scrapes ads on the real estate website for terms like “urgent sale”, “desperate seller”, “mortgage in possession”, “repossession”, “distressed property/sale” and “forced property sale”.
Let’s face it, how many sellers want to tell prospective buyers they are desperate to sell? But with the ASIC report showing about 40% of hardship cases falling straight into arrears once their assistance packages ended, it wouldn’t be surprising to see distressed listings, and the broken dreams attached to them, on the rise later this year.
The Human Cost of Financial Stress
For the approximately 3.5 million Australian households with mortgages, the hardship figures reveal a worrying trend. The Reserve Bank’s latest Financial Stability Review hinted at this growing issue, noting that “a small but increasing share of borrowers have requested and received temporary hardship arrangements from their lenders.”
This “small but increasing” share may actually represent a much larger and more pressing problem. The relatively low rate of mortgage arrears has been cited by some as evidence that the mortgage cliff is a myth. However, the hardship data suggests that many borrowers are being kept afloat temporarily by bank interventions rather than truly solving their underlying financial difficulties.
The rising number of quick resales and hardship notices reflects a multi-faceted crisis. On one hand, property prices are soaring, and some homeowners are cashing in on capital gains. On the other hand, a significant number of Australians are struggling to keep up with their mortgage payments amid shifting economic conditions and rising interest rates.
