Finance Market Update 29 January 21
Flat incomes have been around for a long time and are here to stay and industrial commercial property might be a standout for investment. In this fortnights update we talk about incomes not going up, being a responsible borrower and why industrial property might be a good bet.
Flat incomes and responsible borrowing
Most people’s income has been flat for decades and might not go up again anytime soon.
There is a confluence of forces that have put downward pressure on wages, and it does not look like they will abate anytime soon. Those forces include technological deflation and disintermediation, consistent excess capacity in the labour market, high unemployment, and declining inflation.
In real terms all of that means that it is competitive to get a job that pays well so employers are not paying as much as they used too, or giving big pay rises, governments can’t spend enough, and technology is replacing some jobs.
Real world consequences of those forces mean people might have been working harder than ever but not seeing their incomes go up.
There is huge disparity between high income earners and low income earners, particularly when you count for where they live, racial background and education levels, but when speaking in general terms to the average or median household in Australia it is fair to say we are pretty lucky.
We are lucky because even though incomes might not be moving much our standard of living is extremely high when compared to countries like the UK and Canada, who also have high living standards but are not endowed with rare earth minerals like iron ore that has kept our economy humming along and government able to financially support many people, effectively lifting the overall standard of living.
That is not to say some people are not on struggle street, but most people in Australia are living pretty well.
The issue with flat wages is that ultimately it means people cannot achieve as much. If you are not going to get that raise from your boss or making more income from your business it gets harder to buy things you need and want, let alone borrow money to buy a house for your family.
Not to mention that having your income stay flat or go backwards as many people experienced during the virus crisis, might mean you cannot even afford current debts and that sends people backwards very quickly.
Fortunately, there are considerable changes that have and will happen this year that could counterbalance the downward forces on incomes and borrowing capacity, notably the change in the arbitrary responsible lending laws introduced after the financial crisis over a decade ago.
As part of a response to the virus crisis the treasurer announced, too much criticism given the Hayne royal commissions scars are still visible, that he would be removing the responsible lending laws which were a key factor in tightening credit.
In March, the responsible lending laws are likely to be torn up and that means even though people’s incomes might be flat they might be able to borrow more.
For context, the responsible lending laws impose on the bank or lender that they lend responsibly by making sure the borrower can afford the loan. To do that, they need to analyse your living expenses and income in scrutable detail, and because of the cost of doing that extra step and the potentially financial penalties for being irresponsible, banks and lenders in many cases and times decided to lend people less than they otherwise would have.
This is kind of weird if you think about it.
Why shouldn’t the person taking out the loan be the responsible one to make sure they can repay it?
This is the conclusion the treasurer has come to and is reinforced by the infamous “wagyu and shiraz” case that the government arm ASIC lost against Westpac. ASIC argued the bank was irresponsible for using benchmarks to make decisions, but the judge thought someone could change their spending habits from eating wagyu and drinking expensive wine each night to a more modest meal should they need to afford a home loan.
Because the banks and the government will out the onus on you the borrower to be responsible in how much you borrow we will move from a lender beware to a borrow beware kind of model, and that makes a whole lot more sense.
Banks will not lend to lose money as they make their profits from lending money to people who pay it back.
But we will see banks loosen up a bit and lend a bit more so even if people’s incomes are flat they still might be able to get that dream house.
Commercial property has taken a hit since the virus crisis started.
With workers not returning to the office for about a year in most cases many corporates have started to reduce or plan to reduce their leased office space, even looking to sub-lease space, in an effort to reduce costs, yields and subsequently prices on offices and commercial space has taken a hit.
It is likely for white collar workers they will have a 2/3 split home/office arrangement once the vaccine is rolled out so there will still be a necessity for office space, just not as much.
So as a property investor where does that leave you?
Buying commercial office space or suites might not generate returns even equal to that of residential but there are types of commercial property that could outperform.
Industrial commercial space.
With the rise of e-commerce and a looming boom in infrastructure industrial commercial property could be set to experience strong growth both in terms of rental demand and financial returns.
One key factor is record low interest rates that will help to make industrial property an attractive asset class for investment as it helps to keep the cost low and generate positive yields.
Further, over the past few decades with the rise of Amazon and the billions of sellers through the platform has seen every kind of product imaginable shipped all over the world. But before they land at your doorstep they need to go through a distribution network, and that means through warehouses.
This means increase demand for industrial space as the never ceasing growth of e-commerce continues and consumers stay home more often and buy online even more often.
Compounding those consumer trends are good old-fashioned businesses that require larger commercial space for equipment or inventory.
This will keep demand buoyant as both online and real world sellers need industrial commercial space.