Australia’s remaining deferred mortgages tend to have higher loan-to-valuation ratios or are held by people in industries struggling from the pandemic, a Reserve Bank official said.
“Non-performing loans to households, which had already risen over past couple of years, are therefore expected to continue to rise over the coming months,” RBA Assistant Governor Michele Bullock, who oversees financial stability, said in the text of a speech on Tuesday.
The impact on bank balance sheets will depend on whether the property’s value covers the outstanding debt, she said. Given only a “very small share of loans are currently in negative equity,” losses to banks from housing loans should be limited, she added.
Australia’s economy has been buffeted by the shutdown of large tracts of industry to contain Covid-19, and ongoing restrictions that include the closure of some state and international borders. A spike in unemployment stoked fears of forced housing sales, prompting banks to offer mortgage deferrals and the government to deploy major stimulus to tide over firms and households.
Bullock warned that a substantial drop in house prices could see more properties fall into negative equity.
Australia’s property market has recorded only mild falls during the Covid-19 crisis, with major city values down just 2.6% since March. Yet there are clouds on the horizon.
“With population growth forecast to remain weak for the next year or so and an uncertain economic recovery, it is possible that conditions could weaken, at least in some cities,” Bullock said. “Price falls could be exacerbated by housing investors who, seeing vacancy rates rising and rents falling, decide to sell.”