We are at the start of a credit crunch and property downturn. In this update we look at how unemployment and banks and non-banks putting less money out the door for loans will impact property prices.
Open for business
How many emails have you received from various companies saying they are “open for business”?
I’ve received about 40 and still counting.
Many of these have been from companies I have my email address to years ago and forgot about, from banks and various lenders all trying to sound open.
In a few cases I don’t buy it.
Right now we are seeing big banks and non-bank lenders move the goal posts and change their credit policy away from self-employed applicants, people who work in retail/hospitality and even lowering desired LVR’s to 70% or below, locking out many potential and would be borrowers from access to credit.
On top of this many conditional pre-approvals are in question which is particularly worrying for people who paid a deposit for an off the plan apartment in the last two years.
It is likely defaults on off the plan purchases will sharply rise which will directly negatively impact other apartment values, particularly those in the same apartment complex but even within wider suburbs and cities.
The sound all of this would make is a ‘crunch’ kind of sound.
We have talked before about how access to credit drives property prices in the short term and as we enter a severe tightening of credit it is all but confirmed we will see a dramatic fall in property prices.
Let’s take a look at a few examples of what a credit crunch looks like in real life.
One way a crunch happens is the speed at which credit is lent i.e. loans settling and money going out of the banks account and into someone else’s account.
Australian Bureau of Statistics data for the end of 2019 and early 2020 already showed a sharp reduction in mortgage lending, verifying the slowing of lending and subsequently the aforementioned consequences for property.
This slowness of money going out of the banks into other accounts will continue.
Crunch.
Another way is how quickly banks can actually get to you to talk about what it is you need.
You only have to call one of the major banks main numbers to experience blown out waiting times.
This is largely due to an influx of people that need the repayment break or financial help due to unemployment, which we talk about below, and the governments small business loan scheme.
Their workloads have dramatically increased.
Banks, and non-bank lenders, have been inundated with additional requests which is physically slowing staff down from getting to help their customers.
Don’t get me wrong here, they are trying and doing their best, my point is that things are just going to take longer because they are dealing with so much and which ultimately prolongs the release of credit into the market.
Crunch.
Compounding the issues of time and workload is risk appetite.
Banks appetite for giving people loans has reduced.
A few of them are lowering the debt to income threshold to and in certain cases looking for low LVR’s meaning based on your income you can borrow less and need a bigger deposit.
Certain lenders are not even looking at applications from people that work/ed in affected industries like retail or hospitality.
Further, risk appetite from many non-bank property lenders has evaporated.
Over the past few years non-bank lenders have been moving up market into “prime” territory to take on the banks and offered more flexible requirements to give you a loan.
In many cases they have offered a very compelling option for self-employed business owners or those with a black mark against their name or on their credit file. But now because of the cost of capital for them and required risk returns even they have slowed down lending.
This means across the spectrum of home loan options for people there is a wide reduction is lending – and therefore access to credit – which will negatively impact property prices.
Crunch.
However, there are a few things that could prop up the prices of residential properties.
Namely, the extremely low number of listings keeping demand and prices buoyant, the repayment pauses from lenders and slow down in auctions that means price drops won’t really materialise or be shown in data.
Prices could flatline or at least experience a modest drop of 5% - 10% if the virus crisis social distancing measures are eased sooner than people think, which would be before September or as soon as June.
Waiting in a long line
There are photos on the news showing the long lines of people waiting to get into Centrelink to ask for and claim financial support and it is saddening.
No one wants to be waiting in those lines.
Many of those people for no fault of their own have found themselves stood down and without a job or income and need financial support. Particularly younger people in casual jobs and working in retail or hospitality and who will ultimately have much of the burden of repaying the debt being taken on by the government to fund the country through this crisis.
Unfortunately, the reality is that they need to wait in line if they want to get money, and that line is growing longer every day.
From next week the Australian Bureau of Statistics will release the unemployment figures reporting after March, which is when most people lost their jobs, and it will be the first non-virus-related data points we have seen.
So far, all the data points have been to do with number of infections, deaths and recoveries. We haven’t got the economic data coming through yet because it is always lagged.
From next week it is going to start coming through and it is not going to paint a nice picture.
The estimates from Treasury see a total jobless rate of 10% but many economists think this is on the lower side and I think we will see a rate close to double that.
Even on the lower 10% scenario it will mean there are more Australians out of work now since the Great Depression.
That is scary.
One of the reasons it is scary is because it will put so much pressure on the government to financially support so many people and weaning them off easy money is going to be a difficult challenge even if there are plenty of jobs to go around.
Further, it most cases people on government financial support are not going to be fully repaying their debts and on a form of hardship or bank support like the repayment pause which will put more downward pressure on house prices.
Adding to the stress on the market we talked about above.
By the time things start to normalise many of our friends, neighbours and colleagues might have lost income.