A successful loan ‘thaw’ and booming prices has taken the pressure off banks and borrowers

One of the most positive signs to have emerged from the financial impacts of the COVID-19 pandemic has been the recovery of the “frozen’’ home loans.

At the time when large parts of the Australian economy was closed down, it was feared that there would be a raft of foreclosures and forced sales that would flood the property market.

As it turned out, the reverse was true and the property market has been booming with strong demand, low interest rates and a lack of supply sending prices rocketing higher.

Rush to unfreeze loans as prices rise

That dynamic has also been really helpful in rapidly unfreezing the large number of home loans that were deferred during the worst of the pandemic.

Evidence from the banking regulator the Australian Prudential Regulatory Authority before the House of Representatives economics committee is that the vast majority of home owners are now back to paying off their housing loans normally.

As of February, deferred loans accounted for just 0.5% of banks’ total loan books – a very large fall from the 10% of deferred loans back in May last year.

APRA deputy chair John Lonsdale told the committee that was a “very significant reduction in deferrals”.

“We think that’s a very good news story – that the vast majority of people on deferrals have moved onto paying their loans in [the] way that they were before.”

From $245 billion to just $10 billion – the big thaw

At the peak last year, deferred loans were an astonishing $245 billion but have now fallen to just $10 billion after all bar 3% of deferring customers resumed their repayments.

Even though the number of continuing loan deferrals is small, Mr Lonsdale said that APRA would be watching the banks very carefully as they coped with customers who were still struggling to repay their loans now that the deferrals have ended.

He said with government assistance such as the JobKeeper program ended, life could get harder for some of those who were continuing to struggle to meet mortgage payments.

So far, the major banks have been working hard at communicating with customers rather than moving quickly into foreclosure and that is likely to continue.

Banks unlikely to rush to foreclosure

However, the booming property market would be adding significant comfort on both sides of the ledger, encouraging those with loans to find a way to stay current and reducing the urgency for banks to liquidate houses quickly given the cushion of higher prices.

Even those few customers that will end up having to sell properties will likely be allowed to sell on their own terms and at a price that should leave them and the bank in a reasonable position.

As Mr Lonsdale put it, “The non-performing part of the loan book still remains very low – and has remained very low right through 2020 to now.”

Property prices on a tear

The strength of the property market surge was highlighted by CoreLogic figures which showed the fastest property price growth in the residential market for more than 32 years.

CoreLogic’s monthly property price index showed a 2.8% national uplift in March alone, the fastest growth rate since the 3.2% monthly rise recorded in October 1988.

That March rise completely overwhelmed the previous COVID-19 effects on the property market, with all capital cities now back to pre-pandemic highs.

Sydney (3.7%) and Melbourne (2.4%) are also rising faster than the smaller markets, which until now had been leading the upwards charge.