Finance in 2018 - What Should We Expect to See?
Last year was dominated by the ongoing wind back of lending to property investors and an APRA initiated crackdown on interest-only loans. This led to interest rates for some borrowers increasing quite quickly and brought about wholesale changes in how lenders structured their approach to the market.
What developments are we likely to see in 2018?
Banking Royal Commission
This year will be dominated by the royal commission into the banks. Even though the Federal Government was most reluctant to govern in this sphere, in the end a Royal Commission became so inevitable that the banks ended up asking for one. So far the terms of reference have been designed to draw attention away from the banks themselves and on to the broader financial services industry.
But public pressure for exposure of the major banks’ excesses will become just too great. We will see stories that expose the pervasive sales culture that has dominated the banks' approach to the community they are supposed to serve. Stories of high pressure sales tactics in the areas of financial planning products, insurance products, personal loans and credit cards will be exposed.
We will witness how many bank customers sold products they do not need, are not in their best interests, or that they simply do not understand. Some harrowing stories of financial bullying will emerge. It will not be pretty to watch but hopefully it will lead to some substantive change.
Winding Down of the Property Development Cycle
Following intervention by APRA to cool down an overheating property market it has become much more difficult for investors and foreign buyers to purchase property in Australia. Meanwhile we have seen an unprecedented apartment construction boom in our three largest capital cities.
Many of these apartment projects will complete in 2018 and we are already seeing the effects. Apartment prices have dropped significantly in certain suburbs and lenders have responded by tightening their lending criteria.
This will play out in several ways:
Bank valuations for some apartments will be lower than purchase price requiring purchasers to contribute more equity.
Some buyers who purchased off the plan 2 or more years ago will be unable to borrow sufficient funds to complete their purchases.
Suburbs where there has been a large increase in the apartment stock will experience strong downward pressure on rental returns
Property developers with weak balance sheets will go into administration as they find they cannot offload their residual stock in time to pay down their commercial debt facilities.
we will see the re-emergence of Vendor Finance: developers with strong balance sheets will “help” buyers who cannot obtain bank finance to complete their purchases by providing them with short term mortgage loans, which usually have to be refinanced after 3 years.
Entry of Overseas Funded Lenders
A new trend we are starting to see is a new push by overseas based lenders into the Australian mortgage market. Flushed with cash they are responding to a perceived gap in the market caused by APRA’s intervention and the subsequent tightening of bank credit policies.
This will bring a higher level of diversity, but also a higher level of risk into the finance market. For some it will be easier to borrow money, but it will also be easier to get into financial difficulty.
Economists expect interest rates to remain stable for the remainder of the year. Most are predicting 25 bps rise in the cash rate towards the end of the year. The banks will pass this on in full but I do not expect to see them looking to improve their margins through so call “out of cycle” rate increases. In the climate of a running Royal Commission they will be doing everything they can to look like good corporate citizens.
And in any case their marketing strategies have changed. Expect to see more heavy marketing of superficially attractive 1 and 2 year fixed rate products. Borrowers will need to look beyond the headline rate as these products invariably morph into significantly higher margin variable rate products when the honeymoon period is over.
David, L. (2018). Banking commission is worthless without alleged victims. The Guardian.
Eyers, J. (2017). US fintech SoFi targets mortgage lending in Australia. Australian Financial Review.
Ferguson, A. and Masters, D. (2014). Insider's view to CBA financial planning scandal. The Sydney Morning Herald.
Janda, M. (2017). Interest rate rise tipped for next year by Reserve Bank watchers. ABC News.
Janda, M. (2018). Real estate 'boom is over' as most experts tip property price weakness in 2018. ABC News.
Somersoft Property Investors Forum. (n.d.). Meriton Vendor Finance.
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