Why are mortgages failing in Sydney The hidden factors behind the surge.
Perth’s property market remains stable, while Western Sydney sees a rise in mortgagee possessions. Image: Canva.
  • Rising mortgagee in possession sales linked to high costs, insolvency, and stalled approvals.
  • Delayed impact of cash rate hikes threatens more mortgagee possessions in 2023.
  • While Sydney grapples with distressed sales, Perth's propety market remains resilient.

While the Reserve Bank of Australia’s (RBA) recent decision to hold the interest rates for the fourth consecutive month in a row may provide some much-needed stability for individuals and businesses nationwide, the paused interest rates have done little to curb an alarming rise in mortgagee in possession and receiver sales.

Commercial developments going bust

About 13% of Ray White Commercial Western Sydney’s current listings were currently mortgagee in possession. For comparison, the Western Sydney-based real estate group had almost no mortgagee in possession listings last year.

Several factors underlie this worrying trend; skyrocketing construction costs, the insolvency crisis afflicting the construction industry, rising interest rates, high taxes, and more.

Ray White Commercial Western Sydney managing director, Peter Vines, told The Property Tribune the issue was multifaceted:

“There are probably multiple reasons. Interest rates are always a major factor. Land or property has become far more expensive. But we also have a number of other issues at the moment in the market in terms of increased construction costs,” he said.

“People often have less cash flow when interest rates higher because people are spending less money, so they don’t have as much money potentially going through their business costs, which in general, have been very high. So, projects might not be sustainable.”

The delayed impact of cash rate hikes

Although the interest rates have been on pause for four months now, Vines stated there was a lag between when rates are hiked and when they start to kick in.

With the last cash rate hike occurring in June, the market was finally experiencing the blowback caused by the repeated interest rate rises.

Vines predicted that more mortgagees in possession would follow.

A multifaceted problem

The high interest rate environment, insolvency crisis, and delays in getting approvals for buildings were highly intertwined problems, according to Vines.

“Builders going broke is the symptom of increased construction cost. Interest rates are also part of that, but the other problem is planning. Getting approvals to actually go through and build and develop what you want to do. It’s taking so long to get any approval. You have to hold the land for longer, and it’s very problematic.

“A number of the receiverships or problems we‘ve seen today with developers or builders have been with companies who have had issues with the building commissioner. And there’s all these new standards and requirements to complete new buildings, which add in additional costs and the time of getting them to a point where you can get an occupational certificate.

“While we are fully in favour of having a commissioner there making sure people are building to a high quality, it is impacting the market.

“There are challenges out there which are delaying buildings being delivered, but also, you have people who haven’t done things as well as they should, having to go back and rectify them.”

The managing director explained that building development was particularly susceptible to failure in this high interest rate environment.

“Because there’s no holding income. You can’t generate any income. Your project doesn’t work, it’s more difficult to refinance, and your land tax has gone up. It’s just very problematic, and you’re typically not borrowing money at a normal bank rate, you’re borrowing at an alternate lender rate, which is far higher because you are buying land.”

While Vines did not have data on whether repossessions were also occurring in the residential space, he expressed that the trend was probably happening across the board.

Indeed, the data indicated that home possessions were rising in Sydney. In the six months to June, the New South Wales (NSW) Supreme Court had 346 writes issued for repossession. In comparison, there were 390 repossessions last year and 284 in 2021.

Quality is paramount

When asked for a response, the NSW building commissioner, David Chandler, told The Property Tribune that he would not compromise on quality for quantity.

“There are many factors affecting the supply of new housing stock in NSW, most are outside my influence as the NSW building commissioner.

“My mandate as the new supply volumes increase is clear; quality is not to be sacrificed for quantity.

“As building commissioner, I have been supported by new legislation, powers, and resources to take on this challenge. I make no apology to the risky players who have had to improve or leave the industry. Several notable developers have done that.”

Emphasising the importance of his work, the building commissioner pointed to how consumer confidence in the construction industry was on the rise.

“A recent survey to track how consumers are seeing the improvement in NSW apartment quality, points to a halving of buildings exhibiting serious defects between 2019 and 2022. These results will be published in November,” he said.

“The NSW Building Reforms are resetting the confidence that consumers expect. They want trustworthy buildings. They have directly challenged developers and builders to become accountable for the defects they have left behind.”

Holding bad actors accountable

“The NSW Designers and Building Practitioners Act requires developers and builders to achieve a new standard of design resolution before construction starts on site. The absence of adequate design was the root cause of many of the defects that have plagued so many buildings. These have cost owners millions of dollars to pursue a resolution, often with no good outcome,” said Chandler.

“Phoenixing was a way risky developers tried to avoid accountability. Risky players have no role in the NSW construction industry.”

Phoenixing occurs when a failing or insolvent company shuts down and re-emerges as a new company with nearly identical assets, personnel and business model.

In doing so, debt is left with the asset-free old company, allowing the ‘new’ company to operate with the assets and little to no debts.

In NSW’s 2017-2018 period, 561 construction companies engaged in phoenixing.

“Developers who have embraced the NSW reforms are already seeing the benefits of less re-work, less waste, and faster construction times, said Chandler.

“Those who have not changed their ways are experiencing the costs of having to go back and fix defects which were the result of previous corner cutting, in what most in the industry describe as a historic race to the bottom. These practices hurt everyone from good trade practitioners to consumers.”

“NSW is doing the hard yards of a once in a 20-year reset of an industry that had lost its way.”

David Chandler, NSW Building Comissioner

“The payoff of proactive reform in NSW is that it now leads the nation in restoring a very damaged industry brand. The future looks bright.”

No increase in distressed sales in Perth

The Property Tribune spoke to Cygnet West’s director of valuation, research and advisory, Quyen Quach, who said that Cygnet West did not witness a spike in Perth’s commercial or residential mortgage foreclosures.

In fact, Quach noted that repossessions in Western Australia (WA) were well under the 20-year average leading up to June 2023.

“Despite the substantial surge in interest rates and the cost of living over the past year, Cygnet West has not observed a significant uptick in mortgage foreclosures in Perth, WA,” he said.

Quach remarked that Perth’s healthy job market and employment conditions have sheltered it from distressed sales.

“Additionally, property values in Perth have generally continued to climb in the last 18 months, whereas in Sydney, certain areas or markets within it have been adversely affected by a decrease in property values since the initial rate hike,” he added.

“Due to the higher housing costs in Sydney, it is likely that the proportion of interest-only, fixed-rate loans, and high loan-to-value ratio loans will be notably higher than in Perth, WA, where housing is generally more affordable.

“It is these factors, coupled with households carrying high levels of debt, escalating interest rates and mortgage payments, erosion of equity due to declining property values, and sluggish or negative growth in household income amid rising inflation, that have resulted in mortgage holders falling behind on their payments.

“The depreciation in market value has probably triggered a reassessment of loan-to-value ratios, and given that some of these heavily leveraged households are likely already in arrears, the adjustments in loan-to-value ratios pose a significant risk for lenders, thereby necessitating them to take possession of the properties.”

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