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Economics | August 7, 2020

Record fall in personal insolvencies Personal insolvencies fall most in Tasmania Personal insolvencies Personal insolvencies: The total number of personal insolvencies hit 24½-year lows of 4,239 in the June

quarter (lowest since the December quarter 2005). In fact, insolvencies fell by 35.1 per cent in June from a year ago – the sharpest annual contraction since records began in the September quarter 1987. On a rolling annual basis, insolvencies totalled 20,762 in June, down 23.3 per cent over the year – also the biggest annual decline on record. And it’s a similar story for personal bankruptcies which hit record lows of 2,205, down 30.4 per cent in the June quarter to be down 42.4 per cent when compared with a year ago.

Regional personal insolvencies: In the June quarter, debtors who entered into new personal insolvency fell by the most in the Rest of Tasmania (down 37.7 per cent), followed by Greater Hobart (down 35.2 per cent); Rest of Victoria (down 30.6 per cent); Greater Perth (down 28.4 per cent); Rest of South Australia (down 28 per cent); Greater Adelaide (down 24.8 per cent); Rest of NSW (down 23.8 per cent); Greater Brisbane (down 22 per cent); Greater Melbourne (down 21.2 per cent); Greater Sydney (down 17.5 per cent) and the ACT (down 15.8 per cent). But insolvencies rose in the Rest of the Northern Territory (up 22.2 per cent) and Greater Darwin (up 9.8 per cent).

Where are personal insolvencies highest? Outside the major capital cities, the regions with the most new debtors as at June 30, included Ormeau – Oxenford, QLD (68); Wanneroo, WA (61); Townsville, QLD (58); Wyndham, VIC (56); Rockingham, WA (52); Campbelltown, NSW (49); Springfield; Redbank, QLD (47); Penrith, NSW (43); Casey South, VIC (42); Wyong, NSW (41); and Mackay, QLD (41).

The personal insolvencies data has implications for financial providers, consumer confidence and retail spending.

What does it all mean? Australia is experiencing its biggest economic contraction since the Great Depression with the jobless rate hitting

two-decade highs of 7.4 per cent in June. The contraction is due to government restrictions and business shutdowns to contain the spread of the coronavirus. So one would expect personal bankruptcies and insolvencies to be increasing wouldn’t they? Not so. In fact, data released yesterday and over the past week from the Australian Financial Security Authority (AFSA) shows that the total number of personal insolvencies hit 24½-year lows at 4,239 in June. In fact, insolvencies fell by 35.1 per cent in June from a year ago – the sharpest annual

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Economic Insights. Record fall in personal insolvencies

contraction since records began in the September quarter 1987.

Closer observation of the AFSA fortnightly data shows that personal insolvencies (not in a business and in a business or company) spiked by 189 between March 9 and April 5 - at the height of first wave of the virus outbreak in Australia. But personal insolvencies dropped by 287 over the fortnight ended April 19. And insolvencies were down a further 224 over the period April 20 – July 26.  

Recent fortnightly data released by AFSA also shows that the downward trend in new personal insolvencies continued into July. In fact, the number of people who entered into a new personal insolvency fell from 587 between 29 June and 12 July to 508 between 13 July and 26 July. And the number of new bankruptcies fell from 301 between 29 June and 12 July to 272 between 13 July and 26 July. Those people entering into a new personal insolvency were primarily working in the health care & social assistance; construction; and transport, and postal & warehousing industries.  

And what about the number of personal insolvencies across Aussie capital cities and regions? Well, personal insolvencies in capital cities fell 21.6 per cent over the June quarter, despite the first wave of virus lockdowns in April. Declines were also evident in regional centres and towns with insolvencies down most in regional Tasmania (-37.7 per cent). But debtors who entered a new personal insolvency were highest in Ormeau – Oxenford, QLD (68); Wanneroo, WA (61); Townsville, QLD (58); Wyndham, VIC (56); Rockingham, WA (52); Campbelltown, NSW (49); Springfield - Redbank, QLD (47); Penrith, NSW (43); Casey - South, VIC (42); Wyong, NSW (41); and Mackay, QLD (41).

So why in the middle of a steep recession are personal insolvencies so low? Record low interest rates, the Federal Government’s now $102.2 billion JobKeeper wage subsidy, the coronavirus income supplement (the $500 fortnight top-up to the JobSeeker jobless payment), childcare subsidies, superannuation withdrawals (currently totalling $42 billion) and bank loan deferrals (currently $274 billion in total) have been supportive of Aussie household incomes. Overall, it is estimated that government support measures have boosted household disposable income by around $85 billion or 13 per cent over the past six months.  

The Federal Government’s Coronavirus Small and Medium Enterprises (SMEs) Guarantee Scheme is also supporting up to $40 billion of lending to SMEs. Amendments to the Corporations and Bankruptcy Acts – including the relaxation of insolvent trading laws for six months – have also delayed business insolvencies and related personal bankruptcies during the coronavirus crisis.

Additionally, Aussies have shown an increasing aversion to taking on more debt since the Global Financial Crisis (GFC). While the average mortgage size for owner-occupiers remains elevated nationally at $484,500 - up 11 per cent over the year to June - personal credit is contracting. Over the year to June, personal credit contracted by 10.5 per cent. That is the largest annual fall on record - exceeding declines of 7.8 per cent in May 2009 and 6 per cent in May 1990. Personal credit usually contracts during a recession as households prefer to save rather than spend.

What do the figures show? Personal insolvencies, June quarter & July, 2020

According to Australia Financial Security Authority (AFSA), the total number of personal insolvencies hit 24½-year lows (lowest since the December quarter 2005) of 4,239 in the June quarter. In fact, insolvencies fell by 35.1 per cent in June from a year ago – the sharpest annual contraction since the records began in the September quarter 1987. On a rolling annual basis, personal insolvencies totalled 20,762 in June, down 23.3 per cent over the year – the biggest annual decline on record (since September 1987).

And it’s a similar story for personal bankruptcies which hit record lows of 2,205, down 30.4 per cent in the June quarter to be down 42.4 per cent when compared with a year ago.

On a per capita rolling annual basis, the personal insolvency rate raced towards zero in the June quarter!

Closer observation of the AFSA fortnightly data shows that personal insolvencies (not in a business and in a business or company) spiked by 189 between March 9 and April 5 - at the height of first wave of the virus outbreak in Australia. But personal insolvencies

Source: AFSA

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Economic Insights. Record fall in personal insolvencies

dropped by 287 over the fortnight ended April 19. And insolvencies were down a further 224 over the period April 20 – July 26.  

Recent fortnightly data released by AFSA also shows that the downward trend in new personal insolvencies continued into July. In fact, the number of people who entered into a new personal insolvency fell from 587 between 29 June and 12 July to 508 between 13 July and 26 July. And the number of new bankruptcies fell from 301 between 29 June and 12 July to 272 between 13 July and 26 July. Those people entering into a new personal insolvency were primarily working in the health care & social assistance; construction; and transport, and postal & warehousing industries.  

New personal debtors by region: According to AFSA, “In the June quarter 2020, debtors who entered a new personal insolvency in Greater Sydney fell by 171 (-17.5 per cent) to 806; Campbelltown (NSW) (49) was the region with the most new debtors. The rest of New South Wales fell by 133 (-23.8 per cent) to 425; Tamworth - Gunnedah (29) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Greater Melbourne fell by 159 (-21.2 per cent) to 591; Wyndham (56) was the region with the most new debtors. The rest of Victoria fell by 79 (-30.6 per cent) to 179; Geelong (28) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Greater Brisbane fell by 170 (-22.0 per cent) to 604; Springfield - Redbank (47) was the region with the most new debtors. The rest of Queensland fell by 85 (-10.7 per cent) to 709; Ormeau - Oxenford (68) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Greater Adelaide fell by 60 (-24.8 per cent) to 182; Salisbury (30) was the region with the most new debtors. The rest of South Australia fell by 23 (-28.0 per cent) to 59; Murray and Mallee (13) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Greater Perth fell by 170 (-28.4 per cent) to 429; Wanneroo (61) was the region with the most new debtors. The rest of Western Australia rose by 11 (10.5 per cent) to 116; Bunbury (24) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Greater Hobart fell by 19 (-35.2 per cent) to 35; Hobart - North West (8) was the region with the most new debtors. The rest of Tasmania fell by 26 (-37.7 per cent) to 43; Launceston (12) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Greater Darwin rose by 4 (9.8 per cent) to 45; Palmerston (14) was the region with the most new debtors. The rest of Northern Territory rose by 2 (22.2 per cent) to 11; Alice Springs (7) was the region with the most new debtors.

In the June quarter 2020, debtors who entered a new personal insolvency in Australian Capital Territory fell by 9 (-15.8 per cent) to 48; Tuggeranong (16) was the region with the most new debtors.”

What is the importance of the economic data? The Australian Financial Security Authority (AFSA) publishes provisional numbers of bankruptcies, debt

agreements and personal insolvency agreements on a quarterly basis. Provisional personal insolvency statistics for the financial year are released at the same time as the June quarter statistics each year.

What are the implications for investors? The Federal Government has today upsized the JobKeeper scheme by $15.6 billion following an earlier extension

to the wage subsidy with payments tapered (to $1,000 per fortnight from January 4 for full-time workers) through to March 2021. And the coronavirus supplement has been extended until the end of this year, though reduced from $550 from $250 a fortnight after September. Eligibility criteria had originally been tightened, including means testing with the original flat payment structure replaced by a two-tier system based on hours previously worked. While the criteria has been softened today - with 530,000 more Victorians receiving the subsidy in the September quarter - lower payment rates will likely reduce, but not completely eliminate support for “zombie” businesses.

Nevertheless, a “fiscal cliff” still looms in October, despite the fall being cushioned by today’s additional stimulus. Moreover, around one in 10 Aussie mortgages have been granted temporary deferrals, according to APRA. And $195 billion or 11 per cent of total housing loans from financial institutions have been deferred as at June 30. But by the end of September - when the 6-month mortgage deferral period ends - only those in financial hardship can apply for a 4-month

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Economic Insights. Record fall in personal insolvencies

extension - potentially increasing foreclosures and loan delinquencies.

The virus crisis is escalating in Victoria and uncertainty around the timing of a potential COVID-19 vaccine is continuing. So hard-hit sectors of the economy - where demand is unable to return due to government restrictions - could see a further extension in government support measures well into 2021. For example, the Federal Government has already said that it is unlikely that international borders will be open to tourists before June 30, 2021. The Reserve Bank has cautioned that the recovery phase post-COVID will be “uneven and bumpy” and yesterday resumed government bond purchases to keep borrowing costs for households and businesses anchored at record lows. Interest rates won’t move higher until at least mid-2022 - if not longer - from current emergency settings in this environment.

Of course, the eventual re-tightening of insolvency laws and tapering of government support will increase the financial stress of many Aussie households and businesses. Only viable businesses will be left standing once the government pivots from crisis support to the recovery phase. With individual livelihoods and personal finances often intertwined with small businesses (through the use of personal borrowings and mortgage guarantees for business borrowings) household and individual financial vulnerabilities will increase. A large proportion of personal insolvencies are often a by-product of failed businesses, meaning that it could take at least 12 months for the expected spike in personal insolvencies and bankruptcies to show up in the official AFSA data.

Given the fragility of the labour market, household incomes and business trading conditions, governments could consider introducing alternative support measures, like broad business tax relief (that is, reduction in payroll tax) and cash stimulus to households.  

In fact ACA Research’s SME Sentiment Tracker (July 28) shows that 78 per cent of respondents would like to see the introduction of a COVID-19 insolvency regulation to protect their business from bankruptcy until business conditions and revenues recover.

Either way, individuals and business owners contemplating bankruptcy, insolvency and restructuring options should seek professional advice from an accountant or insolvency practitioner given the complexities and onerous procedures around the Corporations and Bankruptcy Acts.

Ryan Felsman, Senior Economist, CommSec Twitter: @CommSec