Finance Market Update – 18 December 20
In this final update for what has been a unique and challenging year we look backward and reflect on what has happened, but more importantly we look forward and talk about what next year might have for us.
At the end of 2019 there was almost a collective belief that “2020 is going to be my year” as people thought they would seize the year and get the most out of it. As Mike Tyson once said, “everyone has a plan until they get punched in the face” - 2020 punched us all in the face.
As we look back on the year we see words like unprecedented, challenging, tumultuous and scary were used frequently. Other words and phrases entered the collective vernacular like coronavirus, masks, infections, Zoom, COVID and flatten the curve.
Enduring aftereffects of the pandemic (which is far from over) will be a dispersion of workforce and structural flexibility for employees between days in and out of the office. Most likely an average of 3/2 in/out.
Globally over 1.6 million people have died from the coronavirus or related complications. In America more people are dying per day than during world war two. The fight is still happening right now and Australia being a luckily isolated country with no common boarders has helped us immensely. The tyranny of distance can be an advantage. While vaccines are being rolled out it is to soon for anyone to know how effective they will be to curb the overall sickness and death toll.
Lockdowns were harsh and even harsher for some, particularly people in Melbourne who had over a hundred days straight of enforced stay at home orders. However, countries and economies that went hard and fast into lockdowns have been faring better in health and economic recovery than places who relaxed, such as parts of Europe who over their summer holiday time eased travel restrictions.
Money printing of this scale has never before been seen. The term of quantitative easing and fusion of monetary and fiscal policies are flooding markets with cheap capital and ensuring central bank rates remain low and even negative for years. A severe by-product of this is inflated asset prices.
In the 2019-year end finance market update I made a few predictions. Some came true others did not. This year I will be doing the same.
Looking forward, and upward
It is not easy to be optimistic when the world seems grey but there is much to look forward to next year and beyond. Normalcy is relative in an ever-changing environment and the next decade will see more unprecedented events but I attempt to make a few predictions on what next year might hold.
Open banking and financial technology
Throughout the year I have commented on various pieces of financial technology and even said at the end of last year that open banking was one of the new developments I was most looking forward too, and while it has mostly started with a whimper instead of a bang the long term fundamental shifts it will enable are starting.
Practical implications of these shifts will include lenders gathering banking and transaction data in milliseconds which could speed up credit decisions and ultimately help pump credit into the economy.
Another minor but wildly overdue update on lender processes has been the adoption of digital signatures. The pandemic cut out face to face meetings so many banks and lenders started to use various e-signature providers, and this has elevated the customer experience all around.
Open banking will also mean fintechs and other Tech firms and apps will start to supplant the bank to control the customer experience. This will further push banks to an existence as utility providers which is accelerated by their own retreat to core banking rather than vertical integration and a diversified business model.
Prediction – the 100% digital lending experience will start to be seen as the standard across the industry for commercial and residential lending.
Interest rates hit record lows
The cash rate is already at the lowest point ever on record at 0.10% and it is unlikely to move lower, however that does not mean other interest rates will not move lower.
In an earlier update I argued even with home loan rates at records lows, because of increased competition we can expect them to push an edge even lower. Part of the competitive tension that will arise will come from non-bank lenders moving into the prime space and fintech and other forms of financial technology (see above) reduced costs for some lenders who will pass that onto customers.
Business loan interest rates are also at all time lows with the Government guarantee loan scheme two having rates available from under four percent and discounts available on asset finance as well.
Prediction – record low interest rates will be seen in 2021.
National house prices to reach all time highs
In June of 2020 I wrote a contrarian prediction that property prices would reach all time highs in 2021. For context, most of Australia was still in lockdown or just about to have restrictions eased for the first time. Most professional economists’ predictions still espoused a 10% to 30% decline in prices, which has proven completely wrong.
You would think they would see the link between low interest rates, banks yearning to profit, governments need to stay in power and people’s addiction to property as indictors and forces that would support and even elevate property prices. But no. Most professional prediction makers have released their grip of grim forecasts and about faced to come out and say a boom is on the horizon. My client’s readers that got this news half a year earlier and made moves to capitalise on price growth will be fortunate.
Removal of responsible lending next year will further push prices up as credit becomes more widely available and free flowing. A credit wave so to speak.
This is a good thing, and contrary to some views will actually make the banks act in a more reasonable fashion making decisions to approval loans faster and limits being determined with more input from the borrower.
Why would you want a bank to set a limit for you, rather than set one yourself and develop the budget and financial acumen to meet your own goals? If you leave it to the banks then you will always be at the whim of someone else putting a lid on what you can and cannot purchase.
Prediction – National property prices will reach or exceed all time highs in 2021.
Commercial property repurposes itself
At the big end of town, converting commercial office towers into mixed residential and work environments seems like a logical conclusion to the structural shifts occurring in the workforce and the chasing of yield.
We could very well see rezoning or changing of use cases for these towers to allow people to live there. This will put more pressure on apartment values but allow landlords to attract a new kind of customer.
How else can they maintain their usage levels and subsequent values?
Maybe WeWork had it right but through a failed IPO never got to deliver their vision of the “WeLive” work and living community buildings. While many people want to move far away from the city a lot of (younger) people still want a vibe and might be willing to pay for it and the view that comes from A Grade office towers if they became a bedroom.
Prediction – people will start living in the traditional business centres of cities over the next few years.
Australia’s economy comes roaring back
The flow on effects from the (fake) trade spat China has with Australia will have serious economic consequences, far more than just lobsters becoming cheaper and potentially a new Christmas lunch tradition, but will be largely offset by domestic spending and a booming economy.
Already the jobless rate is under seven percent and most industries are busier than ever. Anecdotal evidence points to a sustained momentum into the new year with pent up demand boosting economic activity to the end of 2021.
Talk to a local business owner and they will likely say something along the lines of it has never been busier. This is extremely positive but there are risks on the horizon.
Prediction – almost all economic indicators over the next year will point to a strong recovery from the virus recession.
To all our clients, partners, lenders, supporters, and friends – thank you!
It has been an eye-opening year and one that we will never forget, thank you for being a part of it. We look forward to seeing you in 2021. Onward and upward from here.
Have a merry Christmas and an amazing new year.