Some of the financial consequences from South East Queensland floods were obvious immediately. Now, many months down the track we see the extent, in new terms.
In an earlier article this year I observed “Though many people are doing it tough because of these issues, no more so than one of my friends who find themselves with an uninsured house they cannot afford to repair, a wrecked uninsured business and no way to pay the mortgage or the car loans this month or next month … It is possible that they will be visiting one of my competitors in the next few months.”
I had the inevitable conversation with my friend a few weeks ago. The situation had gotten worse as she had now separated from her husband – that was on the cards for some time – and had hardly worked this year. The conversation that followed was all too familiar as I have had the same conversation numerous times over recent months with other people. Many of these people were in very similar situations and facing the same outcomes.
The lucky ones have sufficient income to be able to get through the tough times that they are still, and will for some time, endure. They can afford to repair their houses and businesses and still pay their mortgages. Others are not that lucky.
The situation of my friend is pretty typical. The house was wrecked in the flood and was not insured for that type of flood. Had they sold their house before the flood (as they had planned) they would have collected about $750,000. Now, as the property is defined as being in a ‘flood area’, the price has dropped as few people want to take the risk of buying in those areas. Houses in these areas are selling, but at reduced prices. Last month it was valued at $650,000, but only after the extensive damage had been repaired.
The house has not been repaired as it was not insured and they did not have the savings or borrowing capacity to fund the repairs themselves. The money from the flood appeal process is not enough to complete the work necessary. The total cost to do everything that needs to be done would be close to $100,000. To sell the house without being repaired is possible, but buyers will naturally take into account and over estimate the costs to do these repairs themselves.
Their $750,000 house may be salable for $550,000, which is about what they owe the bank. The lack of income means that they cannot pay the interest on the loan and, after months of non-payment, the bank has moved to take possession. Because there is little income they cannot afford to repair it and they cannot afford to stay there.
How does my friend avoid bankruptcy? She hopes that the bank can sell the property for more than they are owed. She simply does not have the money to take any proactive steps herself. It is strange to consider it in this way, but she was lucky that there was $200,000 in equity in the house to lose in the process.
We are talking to people who did not have that equity buffer and now owe the bank a lot more than the house is worth on the current market. Some cannot afford to stay and pay a mortgage that is now larger than the current market value of the house, and they cannot afford to sell for the same reason. As I said, the lucky ones still have sufficient income to get through the tough times.
These stories will continue to play themselves out over the coming months.