Australia should brace for a wave of business failures and growing mortgage stress, the RBA warns, as support measures fall away

Australia’s central bank expects the number of small business failures will “rise substantially” as income and loan pressure builds.

With income support measures and more than $200 billion in loan deferrals set to expire, the Reserve Bank of Australia (RBA) says between 10% and 15% of businesses in hard-hit sectors won’t make it as they run out of cash.

“These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures,” the RBA wrote in its Financial Stability Review published on Friday.

“Survey evidence indicates that about one-quarter of small businesses currently receiving income support would close if the support measures were removed now, before an improvement in trading conditions.”

While the RBA acknowledged there was “a high degree of uncertainty about the magnitude and timing” of those failures, the prognosis doesn’t look good.

For one, the number of business insolvencies has been suppressed since March as the government allowed owners to continue operating despite mounting debts.

While helpful at the time, various groups have warned that all that may do is create a business blowout further down the line, that will have even larger ramifications as owners scramble to settle with their creditors.

So too will $200 billion in loan deferrals need to be dealt with by January. It’s telling that even with that option, the RBA notes that commercial vacancies are rising and especially for retail businesses.

“Retail vacancies rose sharply over the first half of 2020. The biggest increase has been in central business districts (CBDs), where vacancy rates have risen to over 10%,” the RBA wrote.

“Further increases in vacancy rates are likely and department stores have accelerated planned closures.”

All of this will have greater consequences for Australian workers, who face the growing prospect of being furloughed at the same time their own income support, in way of JobKeeper and JobSeeker, recedes.

“As at July 2020, around 30% of Australia’s working-age population was receiving JobKeeper, JobSeeker or equivalent payments,” the RBA wrote.

“Despite unprecedented income support, some households have experienced significant falls in income due to job losses, lower wages or reduced working hours. Others face heightened income uncertainty and job insecurity.”

While younger workers have been the most affected, it is homeowners and property investors who perhaps have the most to lose.

It estimates further price falls of 10% would see the proportion of Australians in negative equity — owing the bank more than the new value of their home — double. A 20% fall would see that percentage rise by a factor of seven.

“Extended periods of vacancies could lead to mortgaged investors struggling to afford repayments, and deciding to sell their properties. This has the potential to exacerbate housing price falls, particularly in areas with more investor properties,” the RBA wrote.

However, it is some small business owners who may find themselves doubly exposed.

“A sizeable portion of small-to-medium-sized business loans are also secured by residential property and so difficulties experienced by these businesses could also lead to more forced sales and downward pressure on housing prices,” the RBA wrote.

Not an enviable position to be in as Australia hurtles headlong into a recession.

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