Lockdowns a knock to confidence

The nation’s lockdowns are taking their toll on new home lending and the financial comfort of Australians. While the RBA remains positive, there are still concerns about the economic recovery

Lockdowns a knock to confidence

The value of new home lending in Australia dropped for the first time this year in June, coinciding with the start of Sydney’s lockdown. Declining 1.6% over the month, it was driven by a 2.5% drop in owner-occupier lending – the largest fall since May 2020.

Investment lending bucked the trend, with the value of new loans to investors growing for the eighth consecutive month, rising by 0.7% in June to reach $9.19bn.

First home buyer purchases and loans for construction slowed over the month as incentives were wound back.

Canstar group executive, financial services Steve Mickenbecker said he was expecting the softer figures to continue in line with the extension of the lockdown into July and August, foreshadowed by the subsequent lower auction prices.

However, he added, “We shouldn’t over-estimate the depth of June’s fall, with the month still up 84% on a year ago, when we were in the depths of the first COVID-19 lockdown.

“The investment market remains resilient, though also more subdued, and investors may view the softening in prices as a buying opportunity in anticipation of the same rebound we saw from the first lockdown in 2020.”

Financial comfort at risk

The drop in new home lending comes after a positive six months of financial comfort. In the six months to June 2021, comfort was at its highest level since ME Bank first commissioned its Household Financial Comfort survey nine years ago.

Spending cutbacks, rising residential property and investment markets, an improved labour market and greater household financial resilience built as a result of the pandemic have all contributed to this.

The rise in financial comfort was seen even after the phasing out of government support measures like JobKeeper and despite the ongoing threat of COVID-19; however, the survey was completed before the current outbreak in NSW.

ME consulting economist Jeff Oughton said that while many households were showing significantly higher levels of comfort than before the pandemic, there were still some sections of the population who were not feeling as comfortable, like single parents, casual workers and self-employed Australians. Single parents, couples with young children, retirees and households with low incomes were also more likely to experience ‘rent stress’, according to additional research by the bank.

“Despite more households saving and an overall greater comfort with cash savings, there’s still a significant proportion of Australians that remain highly vulnerable to a loss of income,” said Oughton.

“With pandemic lockdowns continuing to occur across Australia, households with low cash savings are at significant risk, especially in instances of extended strict lockdowns like we’re currently seeing in New South Wales, Queensland and Victoria.”

Vaccines a source of confidence

Maybe a clearer indication of how households are feeling in the middle of the current outbreak is evident in the Westpac-Melbourne Institute Index of Consumer Sentiment for August. While confidence is still well above the negative lows during last year’s lockdown, it’s at its lowest point for a year.

Virus developments at the state level have had a particular impact on the index. The extended restrictions in NSW took a further 4.1% off confidence in the state, which is now down 14.8% from its May high.

However, Westpac senior economist Matthew Hassan said: “Despite the deteriorating situation, sentiment has remained in positive territory, even in parts of the country facing the biggest virus challenges.”

Hassan added that the availability of effective COVID vaccines was a key source of confidence.

“Sentiment is much stronger amongst those that have either been vaccinated or plan to get the jab,” he said.

“This group accounts for 76% of all respondents and has a combined sentiment read 10.7pts above those not willing to get vaccinated or who have yet to decide. The gap is literally the difference between optimism and pessimism – in index terms, 106.6 vs 95.9 – and is apparent across all age groups.”

Concerns over threat to economy

The Reserve Bank of Australia has predicted a strong economic recovery following the current wave of COVID-19 lockdowns. While it said it was prepared to provide more support if the pandemic worsened enough to harm the economic outlook for the year ahead, the central bank expects a rebound to begin before the end of the year.

As of 6 August, banks had deferred around 14,500 mortgages since 8 July due to the ongoing lockdowns, as well as more than 600 business loans.

Speaking to MPA recently, Shore Financial CEO Theo Chambers voiced his concerns about the risk of a debt crisis as Sydney remains in lockdown and other major Australian economies respond with their own restrictions.

“The country is getting into debt to fuel growth, which has implications,” Chambers said. “In the US, inflation has gone through the roof on this quantitative easing we’re doing right now.

“Some businesses get hurt permanently [by lockdown restrictions] and the ripple-on effect from people having to eat into savings during times like this to pay the extra rent or pay for expenses while no income is coming in. It really hurts the self-employed business earners the most.

“I feel like it’s kicking the can down the road of a bigger global economic problem that might arise from this debt crisis that a lot of people talk about.”