What happens when property owners have a reason to sell?

As the COVID-19 shutdown keeps the national economy in various states of lockdown, property investors have been caught in the middle of the crisis.

With many jobs and sectors being effectively shut down, investors are increasingly nervous about how they are going to pay their mortgages. And those fears are starting to ripple their way through the property market.

Last month, we started to see a sharp fall in the number of new listings coming onto the market. With all states seeing falls as high as 90% based on data compiled by Ripehouse Advisory. At the same time, the low number of listings and homes going to auction has been exacerbated by thousands of vendors pulling their houses off the market with the fear that they will not be able to achieve an adequate sales price in this environment.

The numbers are looking equally concerning for new investor mortgages. According to data from CoreLogic, mortgage activity in April fell by 16.9 per cent in NSW, 13.8 per cent in Victoria and 25.3 per cent in Queensland.

At the same time, after slashing the official cash rate to 0.25 per cent, the RBA are now out of ammunition. At the latest meeting of the RBA, Governor Phillip Lowe noted that they expect to see, "output falls by around 10 per cent over the first half of 2020 and by around 6 per cent over the year as a whole."

"The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band," said Lowe.

Lowe has previously noted that 0.25 per cent is already the lower band of where they are prepared to go in terms of interest rate cuts. So in the short to medium term, there doesn't appear to be any further relief for homebuyers or investors from an interest rate perspective.

Banks are being squeezed

Up until this point, both the Government and the banking sector have done everything they can to help struggling mortgage holders. The banks have implemented a 'mortgage holiday' period, whereby borrowers can temporarily freeze their repayments from anywhere between three to six months.

The problem is that this is only a temporary measure. When the mortgage holiday ends, banks are going to need to start calling on borrowers to begin making repayments.

This is made clear by the fact that Westpac just posted a 70 per cent fall in profits and has suspended dividends. Not something its major shareholders are likely going to accept indefinitely and it's something the major banks will have to strongly consider if they are to remain open for business.

When the time comes for banks to call an end to the mortgage holidays and when the Government payments (via JobSeeker and JobKeeper) finally run dry - what does that mean for mum and dad investors?

The holiday is over

Stephen Mickenbecker, Group Executive, Financial Services at Canstar, says there will be cases where banks will continue to work with borrowers as mortgage holidays end.

"When the time comes for the mortgage holidays to end and people are forced to start making repayments, generally speaking, the banks will be open to negotiating that and potentially extending those terms in certain circumstances."

"Now if you can't afford those repayments, that's another matter altogether."

Mr Mickenbecker thinks that those people who are under mortgage stress already are going to be severely impacted.

"There are still options for borrowers. Banks can put you on interest-only, they can extend your terms. But that is likely based on the fact that you have reasonable equity in your property."

"But if property prices have fallen, your loan has blown out because you haven't been making repayments, then it's the banks' problem as much as it is your problem and they'll be asking if it's viable for you to stay in your house? For people in extreme financial straights, they will eventually be saying it's time to move on."

Forced to sell

When the mortgage holidays finally end and banks need to start collecting their mortgage payments once again, this could force many mums and dads to sell.

If that happens, will investors and homeowners flood the market en masse?

"If there was a mass rush to the gates, and investors have to sell, then the assumption would be that the buyers would be equally impacted. This means the floor falls out of the market and we see huge price falls," said the Ripehouse Advisory CEO.

Latest research produced by Ripehouse Advisory has identified 999,065 high risk dwellings across the country. These are homes that are in areas that will not fare well when the mortgage holiday period ends and will likely fall into severe mortgage stress.

Many of these areas have a high reliance on tourism or at risk employment and have already seen rental income fall dramatically, if not completely.

At the same time, there are many property 'experts' out there suggesting this is one of the greatest buying opportunities we've ever seen.

These 'experts' continue to quote the great investor Warren Buffett who advises being "fearful when others are greedy and greedy when others are fearful." The only problem is that Warren Buffett has been busy selling stocks and is now sitting on huge a pile cash. 

If the Oracle of Omaha isn't ready to start buying just yet, should we really be listening to these so-called property experts?

No one can be certain how the next 12 months will play out, but what we do know for sure, is that there are nearly one million dwellings in Australia that are at high risk and will be facing severe mortgage stress in as little as three months time.

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