Responsible lending and borrowing are not the same thing. One slows down credit and the other speeds it up. The faster credit flows the faster property prices rise. In this fortnights update we talk about that shift, and what the budget cash splash and revised coronavirus loan scheme means for business.
Taking it at face value
Responsibility of borrowing rather than lending.
This is what recent changes to the arbitrary ‘responsible lending’ laws are seeking to get too, and with good reason.
The Rudd government introduced these laws after the GFC partly to cauterise anything like the predatory lending that was happening in America, but it was an odd shift and one that has had odd second order consequences.
For example, the laws have generally made it harder to get a home loan since the royal commission, held interest rates higher than they might have otherwise been as banks tried to cover compliance costs and ultimately stifled growth in the economy by slowing the flow of credit.
But in what could be perceived as one of the more bizarre consequences of these hazy laws is that it changes the onus from the person taking the loan to the person making the loan.
This is like saying you cannot sell a house to someone unless you make sure they can afford it.
Why should the seller (lender) have to make sure of that, shouldn’t the buyer (borrower) make sure they can afford it?
The treasurer seems to think so.
And so we will see these laws scrapped and move back to a more ‘normal’ regulatory framework under the banking regulator APRA, who by the way has more defined and often stricter requirements than just the vagueness of being ‘responsible’ and should help to maintain quality lending.
However, this raises a very real issue of “liar loans” that became rampant during the boom that peaked in 2017.
A “liar loan” is when the borrower purposefully underestimates and declares their living expenses to maximise how much they could borrow.
A key difference this time around is ‘open banking’ and the ability for banks to make more informed decisions.
Previously they relied (too) heavily on the Household Expenditure Measure (“HEM”) which was a measure of the median of household spending from the ABS data.
This time around they will be able to pull all of your banking transactional data in less than a second and have a robot analyse it, review it, and score it.
So, while the goal posts are moving it is important to remember that banks are in the business of lending money that gets repaid, not to lose, and will make reasonably safe bets they will get their money back.
For the more unsafe bets, the ever-growing non-bank lenders will be waiting for your call.
But the biggest outcome of this change will be how much it supports property price recovery and growth.
Why?
The availability of credit is a key determinant for property prices in the short term.
If you can borrow a million dollars you will probably spend a million dollars. If you can only borrow eight hundred thousand you will probably only spend eight hundred thousand.
That difference in how much you can borrow and then spend pushes prices upward.
Support for business from the budget
The government wants you to buy things for your business.
One of the key pieces of the 2020 budget for business is a dramatically increased and broadened asset write off benefit which enables a business to buy an asset and claim it on tax at the same time.
A business can completely write off any capital expense, including motor vehicles, equipment, and plant before June 2022. This gives businesses two years to invest to either survive or thrive during and beyond this virus recession.
Well, you can use this as long as your business has less than $5 billion in revenue, which is most businesses, so safe to assume this is relevant for you.
In practice, this enables you to buy an asset for jam.
This should encourage businesses to invest, which is exactly what the treasurer wants to see.
If your business is looking to invest and take advantage of this Let’s Talk about your options.
On top of this and the other numerous benefits announced in the budget is the start of round two of the Coronavirus SME Guarantee Scheme started from 1 October 20 and has marked improvements over the first attempt.
The new and improved loan scheme provides businesses with up to five years to repay the loan and the limit has increased to a million with the purpose of the funds much more open than before.
But the biggest thing should be how these loans are assessed.
Similarly to what we talked about above with banks changing their posture on lending, one of the key blocks on the first scheme was that while the bank bosses said they wanted to do the loans the credit people down the line making the decisions did not get that message.
In fact for many applicants, most of whom had to wait months to get a response and the very few who actually got money, would have found that the people making the decisions were essentially looking for any and every reason not to do the deal.
Many applied for the loan as well only for it to be a guaranteed headache and wait for months to get a decline.
Hopefully in round two things will go differently, time will tell.