In this final update for 2019 we take a moment to reflect on what has been an extraordinary year, review the predictions we made a year ago and make a few for 2020.
Looking backward
Before we look forward lets first take a look backward.
2019 has been an extraordinary year for a few outstanding reasons.
Firstly, legal issues.
The financial services industry underwent a ruthless examination during the royal commission which directly impacted the flow of credit and declining value of house prices.
This is particularly note-worthy because it has such real-world impact on everyday people trying to borrow money.
For example, the average mortgage amounts being approved dropped by up to 20%+, took almost twice as long to get an approval and required significantly more work to get it over the line. This compounded already depressed property market prices adding more downward pressure, which ultimately gave Sydney a 10% decline in property values.
Secondly, politics.
There is a lot that could be said here. From climate change (in action), the ‘miracle’ coalition win, disastrous negative gearing campaign from Labor and a strew of missteps that have left the average voter feeling disengaged, disinterested, unrepresented and wanting major change.
Regardless of political sides we should all be able to agree that the current state of politics domestically and internationally is cause for concern.
Thirdly, the new normal.
The low rate low growth world is here to stay for now.
After successive cuts the RBA has lowered the cash rate to a historical low of 0.75% with no near rises in sight. This is a macro trend happening around the world where rates are so low they basically can’t get any lower before they turn negative.
This means for borrowers rates are going to stay low for the foreseeable future.
Looking forward
This time last year we called out 3 major predictions and said 2019 would be a pivotal year.
One was the royal commission, that it would badly impact banks and put downward pressure on house prices - tick.
Two was about a recession starting (retail?) in 2019 and kicking in during 2020 - yet to be confirmed.
And the third was that property prices would find the find the bottom and start a recovery - tick.
2 out of 3 with 1 still pending is a result we are happy with.
And so, with that in mind we make a few more predictions for 2020….
Cash Rate to hit 0.25%
We expect 2 more cuts next year bring the cash rate down to 0.25%. After this point, the RBA and government will need to consider other stimulus options such as quantitative easing.
The big banks will not pass on all of the rate cut, as we predicated back in an October market update of the next two cuts, in the next one banks will pass on between 0.07% - 0.12%, and the last one after that probably about 0.05%, if that.
Property prices will reach or exceed 2017 peak values
By the middle of next year, the average property prices will reach the same values as the most recent peak from early 2017.
Given we know cash rate cuts directly inflate property prices, and rate cuts are very likely, there is a possibility that Australian house prices will reach all time record eye watering highs next year.
This could well be the top of the mountain before the perilous climb down the other side.
According to CoreLogic, as at the end of 2019 the total value of residential real estate in Australia is around $6.7 Trillion, across 10.3 million dwellings that are $1.8 Trillion in mortgage debt. We expect that those numbers to remain fairly constant.
Banks profit and market share decreases
Profits from the big four banks will take a hit from government fines, remediation and investment in technology. We expect the cost pressures will prove difficult to manage and profits will decline along with their most profitable business area, home loans.
Non-bank lenders will continue to move into “prime” territory and grow market share as they become a more viable alternative for traditional big bank borrowers.
Neo-banks will launch new home loan products, like :86 400 did recent further adding to the competitive mix they will become not only an alternative to the big banks, but a better option – the start of fintechs becoming mainstream
Business conditions and borrowing to worsen
It will remain challenging for small businesses to access finance without property as security, so small businesses will increasingly turn to fintech lenders, and brokers, to source finance as the risk appetite from banks still holds that property is needed for security.
This will further support the growing fintech space of online and small business lenders and more of these start ups will continue to emerge as growth and market share for these products continues to grow.
Open banking will be a game changer
For those unaware there is new regulation coming into effect from the middle of next year that forces big banks and financial institutions to readily share customers financial data.
This will be one of the key moments in a long transformation of the financial services playbook from a “make it confusing for people to understand our products so we can charge more fees” kind of mentality that all the banks have had for decades.
To a more “lets help people make smarter decisions with their money, make easier to use mobile apps and be transparent” that many fintechs are offering.
Ultimately, what open banking will enable is this shift to a new financial services paradigm of better customer service and outcomes.
Thank you!
To all our clients, partners, lenders, supporters and friends – thank you!
It has been an amazing year and we are privileged to work with you and look forward to talking again in 2020.
Have a merry Christmas and an amazing new year!