Shaun’s apartment, Maria’s business and Gary’s mortgage are all linked by one thing: deferred debt

This story has been republished in full from the ABC program Background Briefing. The original story published on the ABC website, also features a podcast and can be found here.

By Geoff Thompson for ABC

The dominoes in the Australian economy are stacked in line and one can easily topple several others.

Key points:

• Australia has some of the highest household debt ratios in the world
• CEO of debt help service WayForward David Berry says a “looming monster” of debt has been growing during COVID-19
• A NAB spokeswoman says there is a limit to how long deferring mortgage repayments can work

Rental reductions and repayment extensions have helped the Australian economy to keep functioning during COVID-19 and have kept our debts at bay.

But soon, many of these measures will begin to end and even with the promise of more relief on the way, some of the dominoes of debt could start to topple in the coming months.

To understand how debt is affecting us all during COVID-19, Background Briefing followed one chain of dominoes, from a single tenant to his landlord up to her commercial landlord and then all the way up to the Reserve Bank of Australia and the Federal Government.

Already on a rent reduction but now facing more COVID-19 restrictions

Shaun, who rents an apartment with his friend Dee in the north Melbourne suburb of Pascoe Vale, said he was trying to stay positive but was finding it tough.

“I have no idea how I’m going to go looking for work,” he said.

He and Dee both lost their jobs at the beginning of coronavirus restrictions in March. As a full-time employee, Dee qualified for JobKeeper but Shaun did not.

“On our last paycheques, both me and Dee sat down and figured out what we could afford, or how we could move forward and how we could actually survive this,” he said.

They approached their landlord, Maria Tuminello, told her they really needed her help and she agreed to halve the rent for the apartment.

“I was so, so relieved. It was just that little bit of weight off the shoulders,” Shaun said.

Since then, Shaun has managed to find a few days a week of labouring work but he’s worried the new shutdown could leave him in a precarious financial position.

“I’ll be back in my parents’ place I just imagine.”

Landlords got relief from the banks

Ms Tuminello has her own problems. She is the owner of Piccolo Vicolo, a cafe in Ascot Vale. She had to close for 10 weeks during the first lockdown.

With two mortgages to service, one on her home and another on the apartment Shaun and Dee live in, she could only afford to halve Shaun and Dee’s rent because the Commonwealth Bank agreed to give her a break on repayments.

“They were happy to do that for six months. We’re just all in limbo waiting to see what happens in September,” she said.

The Australian Banking Association announced this week that banks would be extending breaks on repayments for some customers past September but Ms Tuminello didn’t know for sure what would happen to her repayments.

For now, she is planning to keep her cafe open and serve takeaway during the reimposed restrictions.

But Ms Tuminello has more bills than just her mortgages. She has to pay rent on her cafe to commercial landlord Gary Harley.

He is the next domino in line.

“We’ve given her rent relief until business basically gets back to something, anything like normal,” he said.

Mr Harley has been able to do that because the National Australia Bank has given him a break on his mortgage repayments too.

“We were able to execute that loan deferral very rapidly. That gave us the ability to make decisions to help the tenants, to be honest,” he said.

A limit on how long banks can keep deferring repayments

The banks are the next domino in danger.

Australian banks’ capital buffers against bad debts have improved a lot since the global financial crisis.

But Rachel Slade, the group executive for personal banking at the NAB, acknowledges there is a limit to how long deferring mortgage repayments can work.

That’s because deferred mortgages are still accruing interest and household debts are getting bigger.

“There’s nothing worse than leaving a customer hanging out there, if we and the customer can see that they’re not going to come out the other side of this,” Ms Slade said.

David Berry, CEO of WayForward — a not-for-profit that helps Australians who are drowning in debt — believes a mountain of debt is being temporarily hidden by repayment holidays and stimulus.

“The stimulus and the moratoriums offered by banks are hiding a looming monster that’s building,” he said.

“I think as people start to return to work, they’re going to realise the situation that they’re in and they’re

going to want to find a way out of it.”

WayForward was set up with seed funding from the four major banks and Mr Berry said he expected the service to only get busier.

The key to keeping the dominoes upright is employment

Australia already has some of the highest household debt levels in the world. We owe more than two dollars in debt for every single dollar we earn.

Total Australian household debt is $2,510 billion, according to the ABS.

Reserve Bank deputy governor Guy Debelle told Background Briefing that right now, everything hinged on employment.

“What matters most in your ability to pay your mortgage is whether you’ve got a job, whether you’ve got an income,” he said.

“Obviously at the moment, unemployment has gone up and less people have jobs.

“The big issue here is just how long this goes for and how persistent that’s going to be.”

He said the real unemployment rate was likely higher than the official rate of 7.1 per cent because of JobKeeper.

“People on JobKeeper aren’t necessarily classified as unemployed, the unemployment rate is affected by the JobKeeper program in particular.”

The Reserve Bank has acknowledged that the economy will need to be supported by low interest rates and government stimulus for the foreseeable future.

Prime Minister Scott Morrison announced earlier this week that the Government intended to introduce some support after much of the current stimulus package ends in September.

At the moment, stimulus also means adding eye-watering levels of government debt to the balance sheet — perhaps a trillion dollars of it.

That’s not a problem, according to some economists such as Bill Mitchell, emeritus professor of economics at Newcastle University and one of the early founders of Modern Monetary Theory (MMT).

“There’s no question that the Government can meet all of its liabilities,” he said.

“A government like Australia, which issues its own currency, can always pay it out.”

He said the Government could simply get the Reserve Bank to create the currency that’s needed.

Modern Monetary Theory has long been ridiculed by most economists as “Modern Magical Thinking” because simply typing money into existence risks inflation.

MMT’s supporters say inflation is the last of our worries right now.

But even if you accept that the Reserve Bank can magically type money into existence, that’s a luxury households don’t have.

Household debt relies on income from jobs.

Professor Mitchell believes the way out of our coronavirus recession is for the Government to fund unconditional jobs for anybody who wants them.

“That income support then provides a sort of buffer for the economy,” he said.

The Reserve Bank’s deputy governor isn’t entirely dismissive of Bill Mitchell’s belief that we don’t need to worry about government debt.

“A reasonable amount of what they’re saying is not different from the way I would think about it, and the way a lot of other people think about it. It’s a matter of degree,” Mr Debelle said.

“If you borrow too much, then that’s inflationary or you’re Argentina and you default.

“There are plenty of examples where there are clearly limits. The question is where those limits are.”

 

Struggling to pay for the essentials such as food and rent and want to know more about your options? Our emergency funding page lists some of the available free emergency services and funding if you live in Australia and find yourself in financial difficulty.