Would a double-dip recession burst the property bubble?

As mortgage stress continues to grow, all eyes are on the property market

Would a double-dip recession burst the property bubble?

Just as property is one of Australia’s favourite ‘sports’, so too is predicting its demise – the so-called bursting of the property bubble. But while a double-dip recession could mean a surge in borrowers experiencing mortgage stress, this won’t necessarily equate to a flood of distressed sellers, according to 1st Street Financial broker Cliff Ferrer (pictured).

“I don’t think it’s likely to happen,” he told MPA. “I feel it would need to be a perfect storm, so to speak.”

He pointed to rising property prices over the past year as well as low interest rates.

“That does mean a lot of people do have equity in their homes,” he said. “People are tending to do what they have to in order to keep that asset - and when they can’t, they sell it.”

For existing mortgage holders who have paid off a substantial amount of their property, the combination of low interest rates and a rising property market creates something of a wealth effect thanks to growing equity. But as property prices have risen over the past year, so too has lending to heavily indebted borrowers. According to APRA, the share of new home loans given to borrowers with a debt-to-income ratio of more than six grew to 21.9% in the quarter ending in June, up from 16% in the same quarter last year.

Read more: Lending to heavily indebted borrowers on the rise – APRA

Mortgage analyst at Digital Finance Analytics Martin North recently warned that the number of Australian households in mortgage stress could rise from 41% to 46% if the country went into a double-dip recession.

At the moment, the country is in unchartered waters as it continues to navigate the COVID-19 pandemic. Businesses and borrowers have been impacted by snap lockdowns and border closures in different ways depending on the state in which they live and the industry in which they operate. Ferrer said this had created a two-speed economy. While he wouldn’t be surprised to see another recession given the severe lockdowns many Australians have faced in recent months, support measures introduced by the banks have made a difference for impacted borrowers.

“Some people are doing a lot better and some are doing decidedly worse,” he said. “We’re not seeing a lot of that flow through to property sales.”

In Sydney’s Eastern suburbs where 1st Street operates, there hasn’t been an influx of properties brought to market by distressed sellers, he said.

“We don’t know what the future holds, but at the moment we’re not seeing that,” he said.

In terms of the way another recession would impact borrowers, Ferrer said the number of borrowers in mortgage stress had already been growing over the years.

“It sounds like it’s going to be a bit of a sharp increase in the near future,” he said. “Fortunately, the banks have been pretty willing to stop payments for people without too much investigation and too many hurdles. That obviously helps people going through tough times.

“It’s meant to be a temporary measure and the idea is for people to be able to get themselves back on their feet. It does present an opportunity for people in this industry to restructure loans where required, to make sure that it’s still within the repayment that people are comfortable with.”

Read next: How is the delta strain impacting the property market?

While Ferrer has a mixed bag of clients in differing scenarios, the majority are still doing fine despite the impact of Sydney’s extended lockdown, which has been going for more than two months. Most PAYG clients are generally coping despite some experiencing a small reduction in their wages for a short time.

It’s the clients in impacted industries that are doing it tough, he said. But thanks to the support measures taken by banks, they have been able to pause their repayments temporarily.

“We do have some clients that have been hit particularly hard,” he said. “They may be in an industry that is finding it hard to operate and have gone on to repayment pauses. I’ve found, generally speaking, my client base has been OK - not to say that there isn’t a lot of people that might have found it more difficult.”