More Australians could go into “negative equity”, where the value of their property falls below the outstanding balance on their mortgage, if the pandemic-led recession leads to a big fall in house prices, according to the Reserve Bank (RBA).
In a speech about major risks to Australia’s financial stability on Tuesday evening, RBA assistant governor Michele Bullock warned more businesses would go under and this would have a negative impact on bank balance sheets.
Ms Bullock said the economic recovery from the recession would be “unpredictable and uneven”.
The recession has raised the possibility some households will be unable to meet their repayments because their incomes have fallen.
This would see the banks face an increase in non-performing loans, Ms Bullock said.
She warned that while the share of loans currently in negative equity was low, this could change if there was a substantial fall in house prices.
With population growth forecast to remain weak for the next year at least, it is possible the housing market could further weaken, especially across major capital cities.
“Price falls could be exacerbated by housing investors who, seeing vacancy rates rising and rents falling, decide to sell,” Ms Bullock said.
More households could face ‘difficult circumstances’
While households’ cash flow has been underpinned by government income-support policies, loan repayment deferrals, and low interest rates, and some Australians have been saving and paying down their debt or building deposits, many others are vulnerable.
At the peak in June, about 8 per cent of housing loans were on deferred payments.
“Many of these deferrals ended in September and October and payments have recommenced,” she said.
“There is still, however, a significant minority of households that are seeking to remain on deferred repayments.
“Many of these loans are higher risk, in that they tend to have higher loan-to-valuation ratios or are held by people who work in industries particularly at risk from the current health crisis.
“Non-performing loans to households, which had already risen over the past couple of years, are therefore expected to continue to rise over the coming months.”
She said banks had increased their reserves for future losses.
However, this position could change. The Reserve Bank carried out hypothetical modelling to show what could happen to banks’ balance sheets if something unusual and unexpected happened.
“As an example, one scenario that would see a major bank’s capital ratio fall below 6 per cent — that is well into its capital-conservation buffer — would be a fall in property prices of 50 per cent, GDP declining by 20 per cent and unemployment rising to 20 per cent,” Ms Bullock said.
“A downturn of this magnitude has not been observed since the Great Depression and, even then, capital ratios remained about prudential minimums.
“This confirms that the likelihood of a major bank failing is very low. But there are vulnerabilities.”
Business failures to impact bank balance sheets
Aside from the risk from households, small businesses have been hit particularly hard during the recession, with revenue falling in aggregate by close to 15 per cent since March.
“In industries such as arts and recreation, and accommodation and food services, the declines in sales have been even bigger,” Ms Bullock said.
She said as stimulus measures were wound back, business failures would increase, and this would happen even as the economy started to recover.
“Survey evidence suggests that around a quarter of small businesses that are currently receiving income support would close if support were removed now and trading conditions had not improved,” she said.
The area of particular concern is commercial property, with retail vacancies on the rise.
She said there was uncertainty about prospects for rental demand for CBD office property, particularly in Sydney and Melbourne.
“In both cities, there is substantial new supply coming onto the market, and vacancy rates have already started to rise,” she said.
“Commercial property prices could experience sharp falls in this environment, putting pressure on investors that had borrowed to invest in such property.
“While banks do not have a large direct exposure to commercial property, impairment rates are likely to rise.”
Ms Bullock said there were also still big international risks that could spill over into Australia.
“The current recession is likely to exacerbate these issues and potentially impact the financial system’s ability to cushion the shock.”
Victorian drag on economy won’t be so bad: RBA deputy
Earlier in the day, Reserve Bank deputy governor Guy Debelle was more positive about Australia’s recovery from the coronavirus-driven recession.
He told Senate Budget Estimates Australia’s economy may have performed better than expected in the September quarter.
Dr Debelle said the RBA was releasing new forecasts next week, but his “best guess” was Victoria’s extended lockdowns did not have as large an impact on the national economy as expected.
That means Australia may not record three consecutive quarters of negative growth.
“It looks like the September quarter for the country probably recorded positive growth, rather than negative, and that is the best we can tell, and this will be confirmed when we see the national accounts,” Dr Debelle said.
Australia’s economy contracted by 0.3 per cent in the March quarter, and by 7 per cent in the June quarter.
There were 930,000 Australians considered officially unemployed.
The official employment rate is 6.9 per cent, the official underemployment rate is 11.4 per cent, and the employment to population ratio is a low 60.3 per cent.
In the Federal Budget, Treasury forecast that it could take “about five years” for the unemployment rate to fall to 5 per cent, and for inflation to be sitting comfortably within the 2 to 3 per cent range.
The RBA will announce its next interest rate decision this coming Tuesday.
The governor of the Bank of Canada warns the slower rebound facing women, youth and low-wage workers could pose a threat to a broader economic recovery from the COVID-19 pandemic.
Tiff Macklem says uneven recessions that affect some workers and sectors more than others tend to be longer and leave a larger mark on the labour market.
He notes in a speech to the Canadian Chamber of Commerce that women and young people are more likely now to be permanently laid off from their jobs due to the pandemic.
People permanently laid off take on average twice as long to return to work as people on temporary layoff, Macklem says, risking long-term damage to their jobs prospects and a lasting drag on earnings specifically for youth.
Macklem says the central bank is doing everything it can to support growth and get people back to work.
He adds that getting people back to work is the best way to improve economic outcomes over time, noting that uneven outcomes for some can lead to poorer outcomes for all.
“Striving for equality of opportunity is simply the right thing to do. It’s also good for growth. The loss of jobs for women, youth and low-wage workers is a problem for us all,” reads the text of his speech, provided in advance to journalists.
“If these workers become discouraged and leave the labour force or lose valuable skills over time, their reduced economic participation will lower our potential growth, limiting living standards for everyone.”
The noon-hour speech put more details in the thought process that went into the statement from the bank’s governing council on Wednesday that kept its policy interest rate at 0.25 per cent.
The rate won’t move from near-zero until a recovery is well underway, and inflation sustainably back at the bank’s two-per-cent target. Although Macklem didn’t put a timeline on that in his speech, experts suggest the rate could stay where it is until late 2022 or even into 2023.
He also says that the bank’s bond-buying spree, known as quantitative easing, will be adjusted as required to deliver some monetary stimulus as the economy requires.
Macklem says the bank is watching how the unconventional policy tool affects wealth inequality.
Low price of oil
Low-wage earners and women were among the hardest hit when lockdowns in March and April led to three million job losses, and cut hours for 2.5 million more.
The unemployment rate rocketed to a historic high from a four-decade low.
The country has gained back nearly two million of the jobs lost, but the pace of gains for women, youth, Indigenous people as well as workers from diverse communities have not seen as sharp a rebound.
A global drop in oil prices will continue to hurt the resource sector, Macklem says, which had been an important source of employment in many regions of the country and contributed to boosts in incomes.
“We know that monetary policy is a broad macroeconomic instrument that cannot target specific sectors or workers. But growth and how it is shared are not independent,” Macklem says in the speech.
“The stronger and more durable the recovery, the more opportunity there is for everyone. And the more opportunity there is for everyone, the stronger the recovery, and the more durable is growth.”
MOSCOW, September 4. / TASS /. Russian presidential spokesperson, Dmitry Peskov did not comment on the words of entrepreneur Oleg Deripaska about uneven development of Russian regions on Friday, noting that the businessman has the right to his own opinion.
“Deripaska is a very experienced, knowledgeable entrepreneur who implements very complicated and complex projects, often very successfully. And he has the right to his own point of view, which is discussed at expert forums,” said Peskov.
As reported in a number of media outlets, Deripaska, while addressing the Stolypin Forum on September 3, spoke about uneven development of the regions due to the fact that the country’s authorities, in his opinion, give priority to Moscow. At the same time, he avoided a direct answer to the moderator’s question whether the transfer of the capital would be a way out of the situation, but cited as a positive example the transfer of the capital from Moscow to St. Petersburg in the 18th century.
“So more than one third of younger Australians are either without paid work, or working fewer hours than they would like.”
The unemployment rate jumped sharply for the half of the population under the age of 44, but barely shifted for the half aged over 44. Women are also harder hit on average, with official figures showing 8.1 per cent of women lost their jobs between mid-March and mid-April compared with 6.2 per cent of men.
This is in contrast to previous downturns. Coates says older workers bore the brunt of the early 1990s recession when the manufacturing industry was hit hard.
Similarly, Commonwealth Bank senior economist Belinda Allen says low-paid workers are worst affected by this downturn, whereas the 2008 slump mainly hurt high-paid workers especially in the mining industry.
Out of work
Keona Weller, 30, from Bayside in Melbourne lost her sports therapy business in seven minutes one Sunday afternoon, as she received successive texts from the AFL and other elite sporting clients informing her that the pandemic shutdown meant her services were no longer required.
Nine days later she had to close her clinic – where she had four staff sub-contracted to her company – when the state government closed down massage therapy.
She could not get the JobKeeper payment of $1500 a fortnight because she had not completed last year’s tax return so she applied for unemployment benefits and started driving for Uber.
As a single mother with a 9-year-old daughter, this was not enough to pay the rent so homelessness service Launch Housing stepped in to help her stay afloat.
Weller now has rent relief from her landlord – they recently connected on Facebook and she found out he had offered to reduce her rent but the real estate agent had not passed it on.
Last week she found a full-time job working in a call centre and she now has the all-clear from both the government and her landlord to treat massage clients at home.
“There are a lot of people who are definitely struggling and I am grateful that I was given the chance to get some work,” she says.
The federal government is pumping billions of dollars into the economy, with the two most important stimulus measures being JobSeeker and JobKeeper. JobSeeker is the new name for unemployment benefits and is temporarily double the old Newstart at a base rate of about $1100 a fortnight.
JobKeeper is the $130 billion program to subsidise employers to retain jobs for six months, which Grattan describes as the “most generous social welfare program in Australia’s history”.
A Commonwealth Bank analysis of its own accounts suggest while wages and salaries have fallen, this has been more than offset by an increase in government benefits. JobKeeper payments, which are now coming through after a delay of more than a month, are paid via the employer and will count in wages and salaries.
People who have taken a hit to income include anyone who has lost their job and is either on JobSeeker or who doesn’t qualify for welfare, those who have taken a pay cut to be on JobKeeper, and landlords who have accepted a rent reduction.
Yet, there are also those who are doing better.
Anyone who was previously on Newstart has had their income doubled but only during the pandemic. There was already a campaign – backed by business groups as well as social policy advocates – to raise Newstart, so the Coalition would face a political fight if it wants it to reset to the previous level.
Coates argues it’s unsustainable to keep JobSeeker at $1500 a fortnight indefinitely, given it is higher than the age pension and many entry-level jobs, but believes it should be $75-100 higher a week than the old Newstart.
Meanwhile, anyone who earned less than $750 a week and is now receiving JobKeeper has had a pay rise. Grattan analysis, reported in The Sun-Herald, shows JobKeeper equates to about $39,000 a year, or 70 per cent of the median wage, and that will be a pay rise for 80 per cent of part-time workers.
But for professionals, like Ilina Lovely from Marrickville in Sydney, JobKeeper is a pay cut.
Lovely, a single mother of two children aged 7 and 9, has been stood down from her hospitality management job because of the lockdown. The size of the venue means it could be months before it’s viable to reopen.
While Lovely is grateful for JobKeeper, it is about half her normal income and only covers her rent and some of her bills.
“It’s been a bit scary,” Lovely says. “We were already struggling financially so this has just totally tipped us over the edge.”
She expects to burn through her small stash of savings and start accumulating credit card debt before she returns to work.
The spending slump
One of the biggest risks to the economy is the slump in consumer spending and confidence.
National economic figures show many people have maintained their full income and are saving their money, whether for lack of anything to spend it on during lockdown or as a precautionary measure.
Free childcare has also been a boon for millions of families using long daycare, vacation care and after-school care.
What happens next depends on how quickly things open up, whether efforts to open up the economy spark a second wave of the pandemic, how consumers behave, and how long the government maintains its stimulus spending.
The Reserve Bank has forecast gross domestic product to fall 8 per cent in the six months to June with further falls in the second half of the year, before a recovery in 2021.
Meanwhile, wages growth is expected to slow to 1.5 per cent in December 2020, down from 2.1 per cent in the March quarter of 2020.
There are hopeful signs consumers are starting to loosen the purse strings. Commonwealth Bank figures, based on its own credit and debit card transactions, point to a cautious recovery in consumer spending. Overall spending was down 2 per cent nationally and 4 per cent in NSW for the week ending May 8, compared with the same week last year. But only three weeks ago, spending was down a whopping 20 per cent year on year.
However, Allen cautions against too much optimism. It was a weak point for the Australian economy 12 months ago, with unemployment rising leading into the May 18 federal election and just before the Reserve Bank’s first interest rate cut.
“The comparison to 12 months ago may not be fair,” Allen says. “What we are comparing it to is the momentum in the Australian economy pre-coronavirus. Compared to earlier this year, spending is still down around 10 per cent.”
Andrew and Vanessa from Ashfield in Sydney, who requested to go by first name only, have become accidental savers.
Their income is the same but their expenditure is much less, because they are no longer going out for dinner and drinks and they cancelled an overseas trip.
Andrew, 39, is a public servant working from home and Vanessa, 40, runs a small arts organisation with secure funding. Her salary is subsidised by JobKeeper but topped up to the full amount.
Usually the couple, who have no children, are out seeing friends and going to art openings several nights a week, but that’s all stopped. “We Zoom with friends and that’s it,” says Andrew.
Vanessa says the couple was trying to spend the extra cash to support local businesses and the arts.
“Maybe it’s buying a fancy steak from our local butcher, buying beer from our favourite brewery in Marrickville, buying a voucher for a favourite bar in Newtown,” she says.
“We’ve also bought earrings from a friend who is a designer and an artwork from a commercial gallery of an artist that we really like.”
The couple is still saving more than usual, and interest rates have fallen, so they are getting ahead on their “enormous mortgage” and spending on home improvement.
Andrew says their situation was unusual in their social circles because the arts industry was one of the hardest hit.
Those left out
Not everyone is eligible for JobKeeper. The scheme does not cover freelancers and people with episodic employment, for example an arts worker who works on multiple productions. It also does not not cover people who work for universities or any businesses owned by another government.
Media Entertainment and Arts Alliance chief executive Paul Murphy says there needs to be a specific support package for the arts, because the impact has been “devastating”.
“A number of people have said we risk losing a generation of performers and other professionals in the industry, because it’s just too precarious,” Murphy says.
“The reality is, if screen and live performance and music are going to get back up and running again, it’s going to require a specific assistance package from the government and that’s what they’ve been refusing to do up to this point in time.”
The federal government’s plan for step three to reopening the economy will still limit audience sizes to 100 people. Even then, physical distancing requirements are likely to mean even small venues can’t be filled.
Meanwhile, migrants on temporary visas are not only ineligible for JobKeeper, but also barred from receiving any welfare benefits. Other countries such as Britain have included migrant workers – including Australian expats – in similar schemes.
Andres Puerto, 27, is an international student from Colombia, halfway through his Master in Business Information Systems in Sydney.
Last year he started a business renting e-bikes to other international students working for delivery companies and he feels lucky that he’s been able to keep this going during the pandemic.
Puerto says most of his fellow international students were working in jobs as cleaners, in the hospitality industry or construction and lost their jobs overnight. He has been volunteering at the Addison Road Community Centre food pantry in Marrickville, which has mobilised a huge community effort to feed people left destitute by the downturn.
“I know how it feels to be vulnerable, I know how it feels when I was here for six months with no English and not much money,” Puerto says. “It is very difficult for them.”
Puerto says students have been told to access their superannuation but that does not help the new arrivals. In his own case, he tried to access his super only to discover his previous employer had never paid it.
He believes there needs to be more support for international students and universities should offer fee relief if they are not offering face-to-face teaching.
Caitlin Fitzsimmons is a senior writer for The Sun-Herald, focusing on social affairs.