Banks should extend mortgage grace period if COVID-19 downturn bites too hard: economists

The six-month grace period being offered by the banks to mortgage holders may not be enough to see off the ill-effects of the coronavirus-induced economic weakness and a longer period may be needed, economists warn.

The national shutdown of non-essential industries, travel and the closing of international borders has left thousands without jobs and more on reduced incomes. The Australian Treasury has predicted the unemployment rate will spike at 10 per cent.

The property market has suffered too, with both sale and rental activity dropping. Renters and landlords have also been locked in a battle about the non-payment of rent, as many renters lost their jobs in the retail, service and arts industries almost overnight.

As a result, banks have begun offering mortgage relief to those who have had their income impacted or tenants who have had the same.

Riskwise Property Research chief executive Doron Peleg said the six-month window might not be enough for some, and hoped banks would shoulder the burden to reduce the impact on the economy.

“Our assumption is there will be a major spike in credit defaults across the entire country in the next 12 months,” he said. “We can also assume that following the reputational damage from the banking royal commission, the major banks will make an effort to show they truly support Australians in such difficult times.

“So, we can assume that no major bank will seek the negative reputational damage of repossessing the homes of those who have lost their jobs due to COVID-19.”

Mr Peleg said for the least desirable houses, a forced sale could result in up to a 15 per cent price reduction.

Domain economist Trent Wiltshire said that forecast could be optimistic, but he agreed this might be necessary if mass forced sales were to be avoided, and with them mass price falls.

“There’s a potential this crisis will drag on well into 2021 and some people might need to be able to defer their payments for a lot longer,” he said. “If that’s the case and the economy’s still very weak and people start defaulting on their mortgages, we might see more significant price falls.

“It’s impossible to know where the economy will be at the start of next year.”

SQM Research’s Louis Christopher said it would be within the banks’ interest to avoid having to foreclose every home in mortgage arrears as a result of the crisis as they would lose money on the bad loans, and said they’d acted with similar self-interest in the global financial crisis.

“At that time it was the commercial lending sector in deep trouble with a number of commercial property owners in breach of their lending covenants with the banks,” he said.

“In the end they decided to give the sector grace and not call in the loans because of the breach of covenant. And they did that to basically save themselves.

“It would have been damaging for the economy and their lending sheet [otherwise].”

Weak economic recovery by the end of the six months or a resurgence of the virus could force banks to extend the mortgage relief, Mr Christopher said.

Mr Wiltshire said some might still slip through the cracks, as banks would try to manage the arrears on a macro scale and not try to keep every person in their homes.

“There’s no doubt some people will need to sell their homes and that’s always the case,” he said. “There’s always people who can’t afford their mortgage, who have negative equity.

“But it’s about the extent that that happens. Banks are worried about that being widespread and not just a small uptick.”