How will Covid-19 impact the mortgage market?
Early data to date suggests that borrowers are pulling back from making additional payments on their mortgage repayments even before the COVID-19 pandemic intensified. Nitish Bhatt assesses the outlook for the sector.
Over the last 6 months the Reserve Bank of Australia (RBA) has cut the cash rate by 75 basis points. The last time the RBA made such a drastic cut within a 6-month period was during the global financial crisis (GFC). Their actions during the GFC were taken in order to fight the financial contagion that was spreading as a result of the collapse of the sub-prime mortgage market in the US.
Now, we have seen the Reserve Bank cut rates in response to the COVID-19 contagion. Australia’s response to the GFC was amongst the most successful in the world, with the RBA and the government working in tandem using both monetary and fiscal stimulus to prevent a recession.
However, what is different this time is the difficulty of stimulating the economy given the current situation, with the health risk that COVID-19 poses forcing governments to announce lockdown protocols that in turn may act as a catalyst to weaken economic activity and, potentially, push the economy into a recession.
Meanwhile, the RBA is trying its best to counteract the threat of going into a recession with their emergency rate cut decision in mid-March aimed at helping those who are most affected by the pandemic, such as SMEs. However, given our current near zero cash rate of 0.25 per cent, there is only so much more the RBA will be able to do via monetary policy to stimulate the economy.
A big reason why we are in a historically low rate environment is that prior to the spread of the COVID-19 pandemic, the RBA was focused on increasing borrowing activity and improving sentiment amongst current mortgage holders by decreasing their debt burden.
Ideally, a change in the cash rate and mortgage stress amongst mortgage holders should follow the same trajectory. However, this is not always the case as the effectiveness of monetary policy is contingent on lenders passing on the rate cut onto their customers.
The rates cuts over 2019 also revealed that the specific action lenders take in notifying and or automatically adjusting their customers repayments also impacts the degree to which monetary policy stimulates the economy. RFi Group research suggests that only 9 per cent of mortgage holders decreased their repayments to the new minimum repayment as a result of the rate cut.
This dropped to 4 per cent for mortgage holders who did not recall their lender notifying them about the rate cut. Although, this is does not consider mortgage holders who would have their repayments automatically adjusted by their lender.
It does highlight the extent to which lenders can influence the effectiveness of monetary policy.
Furthermore, RFi group data highlights that, mortgage stress has increased slightly in March while overpayment intention has declined.
The threat of the COVID-19 pandemic is likely having a significant impact on our most recent Mar-20 results and will likely continue to impact borrower sentiment in coming months.
Source: RFi Group
Historically, mortgage stress is higher for self-employed mortgage holders and these borrowers will be more susceptible to financial distress as a result of measures in place to fight the spread of COVID-19, including lockdowns. In fact, we are already seeing the initial impact of COVID-19 on sentiment in RFi Group’s SME research. The below graph shows the exponential increase in the proportion of SME’s who believe that COVID-19 is the number one challenge they are currently facing.
Source: RFi Group
Given the magnitude of COVID-19, lenders are doing their best to support those affected by the pandemic. The big four banks were quick to give their borrowers the ability to put their repayments on pause for up to 6 months. Although this will help ease the pain for borrowers, the long lasting impacts of COVID-19 on the mortgage market and economy more broadly remain to be seen.
Nitish Bhatt is a senior research analyst at RFi Group. RFi Group’s March 2020 research reports will be available from early-mid April.