The impact of Covid 19 forcing the closure and stand down of businesses has had a significant impact upon Australian households, creating rising unemployment levels and reductions in income. Despite a $130bn Jobkeeper wage subsidy program announced on April 9th, RBA projections of 800,000 jobs lost and ABS citing 6.7% average reduction in pay has seen household incomes fall. A significant consequence of reduced household income levels is the inability for renters to pay landlords, creating undesirable social outcomes potentially leading to ‘overcrowded’ dwellings, rising homelessness, and additionally reduced landlord income.
Of important note is Australia’s already precarious housing market and low interest rates.
As indicated above, Australia’s income to housing price and debt ratios have risen dramatically since the 1990s with the 4th highest debt levels in the world. This has in part been supported by loose Monetary policy which has increased the availability of credit driving the growth in debt, prices and housing loan commitments. This is important because as a result, Australian renters and mortgage payers have committed themselves on average to high, relative to income level, rental prices and mortgage loan commitments, with ⅓ of renters housing stress and more than 1 million households prior to Covid already struggling with mortgage stress (difficulty meeting mortgage repayments).
A further issue is that whilst landlords on average have higher income and wealth levels, many landlords are not excessively wealthy, who now have to deal with a double ‘blow’ of reduced incomes due to job loses and threatened rental incomes, albeit slightly mitigated by favourable negative-gearing laws. In order to reduce the adverse social and economic impacts, the Government, in addition to other Fiscal measures, has proposed a temporary ‘moratorium’ on evictions for 6 months for tenants severely affected by coronavirus. They primarily include low income households who have either experienced a job loss, household income level reductions of >25% and people who have contracted the virus. NSW Premier Gladys Berejiklian has rolled out these eligibility criteria, banning landlords from evicting tenants who fail to pay their rent because of COVID-19 job losses. Additionally Australia’s big four banks announced borrowers could “pause” their mortgage payments. Despite this temporarily reducing the rate of mortgage default, interest not paid will still be capitalised into debt, so they will have more to pay off after the “pause” ends. As a result, if an easing of lockdown or an extension of already highly lenient policy measures are not in place after the 6 months "grace" period, Australia could witness a severe increase in mortgage default, rapidly falling asset price, low investor confidence and rising homelessness, which will create a disastrous impact on economic growth levels.
Ultimately, the objective of economic policy is to create desirable social outcomes for society. A fundamental factor why mortgages have been placed on ‘paused’ and a moratorium on evictions have been put in place is that the threat of rising mortgage defaults and evictions creates disastrous long term social and economic consequences. As a result of evictions and mortgage defaults, individuals can become quickly disincentivised and dissatisfied, potentially leading to undesirable social problems via increased drug usage, crime and a lack of engagement. All of these create burdens on society through weakened confidence levels in the economy, and via the process of hysteresis (short term, low EG induced UE) increased hard-core and long term unemployment. Lower employment levels and individuals stuck with the burden of finding new accommodation who can’t commit to full-time employment reduces Australia’s national output, productivity and Aggregate supply levels, thereby reducing economic growth and living standards.
The impact of temporary job loss and reductions in incomes disproportionately affects lower income households, who have a greater propensity to be in mortgage stress, a greater subjection to regular rental payments and where the family home is often the only source of household wealth. Whilst falling asset and housing prices generally affects Australian’s unilaterally, lower income households which have long term variable mortgages and short term debt commitments face the risk of losing their only asset due to mortgage defaults, further worsening Australia’s unequal distribution of wealth.