Beware the second layer of critical COVID-19 debt

There is a second COVID-19 debt crisis that is often forgotten as Australia continues to try to limp out of its bruising fight with the wily viral enemy.

The first debt crisis is the $274 billion of mortgages that have been frozen by the banks – at least some of which will become bad loans when the lenders “suggest’’ that it might be time to start repayments again on what will now be bigger loans.

The second debt crisis is the one that is engulfing the rental property industry – both the private residential rental market and also the bigger battles being fought between shopping centre owners and their business tenants.

In this case the debt isn’t all of the banking variety – although a lot of bank debt is involved as well – but can be a more informal type.

Eviction ban coming to an end – except for Victoria

It relates to the unprecedented ban on evictions from rental housing by National Cabinet back in March.

That ban was seen as essential at the start of the crisis because turfing people out of their homes because they had lost their jobs was seen as a bad health move, let alone the economic ramifications.

Even the homeless were offered accommodation to tide them over the COVID-19 pandemic, with the previously intractable homelessness crisis magically “solved’’ at the stroke of a pen.

No doubt, the homelessness crisis will once again return after the pandemic but that is another issue entirely.

Landlord and tenant battles continue

What the eviction ban did – a ban that has been extended until next year in Melbourne but which is coming to an end in other states – is to pit tenants against landlords in a battle that really had very few rules.

Tenants could ask for rent relief while the eviction ban was in place but many landlords – who are also often paying off large debts – could simply refuse to play ball.

Some landlords did provide lower rentals but the most common arrangement was to “defer’’ rents for a time, with the unpaid rent ballooning to be paid down the track.

At the same time, many of these landlords might have been playing a similar game with their banks – reducing repayments or going into a loan holiday arrangement with their bank on the understanding that they would start repayments down the track.

There were lots of unpleasant negotiations and requests for detailed information about financial positions but as a rule, the rental agents were usually better negotiators than tenants so the unpaid rent balloon model was the most common agreement.

It is a big problem too, with eight million Australians renting their homes and 2.2 million landlords, some of which own multiple investment properties.

Retail battles see haircuts all around

A similar but much more hardball negotiation was happening at the same time between retail shop owners and their tenants with a variety of deals and arrangements reached with the most likely outcome being that both sides took something of a haircut.

There are a few noisy landlords like Solomon Lew’s Premier Investments (ASX: PMV) that played ultimate hardball by refusing to pay rent as soon as centres were closed and then tried to negotiate massive rental reductions.

But on the whole, landlords and shop tenants will have come to an agreement on current and future rents or the tenant may simply go broke – we’ll have to simply wait and see what happens as the economy slowly starts to reopen.

Debts building up as assistance dries up

The result of all of this activity in both cases is the accumulation of debts of various sorts that may or may not be paid when the crisis comes to some sort of untidy end.

It us not anybody’s fault necessarily, it is just that with unemployment rising fast and with JobKeeper and JobSeeker assistance payments being wound back, in some cases there will simply be no money to pay with.

Complicating the issue is the fact that the rental market for housing and also shops has itself been fundamentally changed by the pandemic and associated recession.

In simple terms the number of people and businesses looking for rental accommodation has been falling and so rents have fallen with it.

Rents falling fast

According to Suburbtrends.com, rents have dropped 19.6% in the Sydney CBD over the past year and 17.5% in the Melbourne CBD.

That comes after many years in which landlords held the whip hand and were able to apply rental rises every year.

Vacancy rates have also been rising fast and accommodation that had been let through Air BNB and other means is coming on to the rental market – not to mention new apartment blocks being opened as the overseas student market wilts.

In Melbourne under stage four restrictions, with in-person inspections banned but moving house allowed, inner-city vacancies have jumped markedly.

Vacancies rising too

Corelogic data suggests vacancies rose 20% between July and August and a huge 140% compared with August last year.

All of these circumstances are conspiring to make the end of this crisis even messier than expected.

For example, what is to stop a renter who has been building up a repayment “deferment” or “debt’’ to be dealt with at the end of the crisis from deciding to shop around for a better deal and departing, leaving behind an unpaid debt that may or may not be able to be made up for by the usual one month bond?

Or even from to call the agent and suggest they match the lower rents on similar properties in the area or they will walk.

It would be a brave landlord indeed who continued to play tough and took the risk of their property remaining empty for a long period of time.

Of course, it is not that simple.

There are rental contracts to consider and some tenants won’t want to move at all – particularly if they have lost income and would struggle to be considered for a new rental.

There are complications on the landlord side too – while negotiating with banks for a lower interest rate and threatening to refinance has become something of a national sport for owner-occupiers, there are some reasons why landlords might not be willing to play.

Do they really want to go to another lender and find that the property valuation has taken a hit so big that their loan needs to shrink accordingly?

Or, worse still, find that other banks simply aren’t interested in providing an interest-only loan?

It all makes for a messy debt situation when you factor in a shrinking economy, the possibility of more lockdowns down the track and a weak property and jobs market.