Finance Market Update - 31 January 19
In this first finance market update of the new year we continue to discuss how credit has and still is driving property prices and what might happen this year, including with rates, property prices, regulation and the impact on borrowers.
This is a credit crunch
Low auction clearance rates and falling property prices are the direct result of reduced access to credit.
Access to credit has been gradually reducing, so while it hasn’t been a sharp crunch, the same effects are being felt, cause and effect.
I have been writing about how we are experiencing a credit crunch and how credit drives property prices since last year and want to cover this again as it is a key issue right now and helps to explain the road ahead.
Credit, that is when we are talking about the property market, mortgages, determines prices of property.
This is because fundamentally the more people can borrow the more they are able to pay, which means there is more competition and so prices are driven higher.
The opposite is true on average. The less credit that is available the less people can borrow, so the less they can offer for a property, which brings prices down, as we are seeing now.
One could argue that after a 6-year property boom, where we saw prices in Sydney increase by 75% and 55% in Melbourne that this change is a fundamental adjustment to price growth.
This is a true argument, but we must recognise the fundamentals that drove up prices. Being low interest rates, the ability for investors to borrow (interest only), foreign investment, plenty of apartments being built, strong employment and population growth. And of course, credit.
Rates are going up
The RBA will continue to find itself dealing with a mix of micro and macro-economic data points which will make it a challenging call for them to move the cash rate either up or down.
In reality borrowers will see higher rates regardless of the RBA Cash Rate moves.
Prospective borrowers or existing mortgage holders should brace for higher rates and repayments.
There will be exceptions to this as competition will remain fierce and banks will aim to keep rates low but generally higher rates are on the way.
One of the key drivers in rates from banks is that it is taking them longer and is more expensive for them to assess mortgage applications, specifically looking at living expenses takes time, so they charge customers for it.
Over time technology will alleviate a lot of this burden for them through automation but for now borrowers must brace for intense scrutiny of their spending patterns.
NAB was the last of the big 4 banks to raise their rates a few weeks ago after holding out since September last year. This is a clear signal that the direction for the big banks rates is upward.
There have been recent calls that the RBA should lower the cash rate to alleviate funding costs for banks which in theory will help them keep rates low, but in practice this is not a sure thing as the correlation between the cash rate and bank rates is less connected than it has been in the past.
The banks will continue to point to funding costs as the main reason for increasing rates, but our readers know this is also in chase of profit.
The Royal Commission’s final report
The final report after a year of Hayne uncovering scandals and shocking issues within the broad banking and financial services industry was due to be released today but has been put under embargo by Treasurer Josh Frydenburg until next Monday.
This final report has everyone in that industry worried.
The reasons they are worried is varied but fundamentally the same - what impact will it have on income.
Skyward Financial holds a finance broker license and changes that come from the final report will impact our business, but more importantly it will impact our clients.
Clients with a home loan could face higher rates as banks incur high costs to deal with the report. Prospective borrowers face intense scrutiny of living expenses and financial position. Small business owners could find it harder to get or roll over business loans that are secured by residential property as prices fall due to the drop-in credit availability. We are dealing with clients in all of these situations and are prepared for a recession, changes and are committed to helping our clients regardless of the report and repercussions.
It is worth commenting here on a few of the repercussions already happening from the Royal Commission.
Firstly, more people are using brokers for home loans than ever before, 59% as of last count by the industry body the Mortgage and Finance Association of Australia, showing distrust of banks and willingness to use other lenders. Which secondly shows a trend of borrowers using second tier lenders or “shadow lenders” instead of the big 4. A trend we commented on months ago.
It is even likely things will get worse as the final report from the Royal Commission is due now and if we have a change of government to Labour we should expect all of the recommendations to be accepted and implemented. If that happens banks could have a knee jerk reaction and lending will significantly and sharply decline.
Fortunately, because Skyward Financial is an independent finance broker who works across the spectrum of lenders from the big banks, to mid-tier lenders through to specialist lenders and we can service clients for investment loans, home loans, business loans through to distressed acquisitions.
Longer sales cycles for property
Back in the ‘good old days’ during the peak of the Sydney property boom around 2016 a property could be sold within weeks or even days.
Buyers were worried on missing out on deals. Banks were lending (too) freely. Investors were throwing money around and developers had plenty of apartments to sell.
How times have changed. It appears now that the sales cycle for property has extended as all those things have reversed. Except for developers selling apartments, this is still happening and in fact we will see many developers offer crazy deals for those willing and able to buy.
It is worth mentioning here that auction clearance rates at the end of last year were consistently under 50% which means not only are properties taking longer to sell but less and less are even selling.
Over 2019 the sales cycle for property will continue to be lengthened as the pool of potential buyers (borrowers) decreases along with prices.