Happy New Year everyone. Now that 2016 is behind us let’s look at some of the issues that dominated the financial world which may have affected you and then we’ll look at what may or may not happen in 2017.
The year (2016) opened with the unusual step of the regulators trying to control lending to retail customers (you and me) by threatening banks with capital controls. Specifically, they did the following to tighten lending:
- Enforced new rules on servicing criteria.
- Tightened rules around a borrower’s real world expenses.
- Excluded non-resident borrowers’ offshore income (in most cases even if it could be proven).
- Banned quite a few mortgage brokers that fraudulently but successfully procured loans for their clients and then got the financiers to compensate their clients.
- Put caps on banks’ exposure to the property market with at least one bank asked to stop lending against property valued at over $5M.
As well as the above restrictions, banks themselves all but stopped lending to most property developers in fear of losing their shirt when the market cooled. As a result many developments have simply stalled and smaller developers — faced with financial difficulties — are being forced to sell to larger developers with access to funding.
All the above has done is create an illusion of scarcity among some potential borrowers. Nothing could be further from the truth. There is an abundance of funding available from non-traditional lenders but potential borrowers are still nervous about taking money from a name they don’t recognise. This (il)logic has befuddled us.
The above measures have led to a crowd mentality that they may be missing out and it has only added fuel to the property fire.
So, what’s likely to affect you in 2017? The short answer is we don’t really know for sure but let’s have a crack at the headline grabbing obvious ones and then we might explore some of the less obvious.
- Rate increases. Nothing affects the property market more comprehensively than rate rises. Most economists are forecasting just that for 2017. Let’s wait and see.
- Demand and supply. With demand ever-increasing, it will be interesting to see just how much the restrictions on property developers in 2016 will affect the supply side of housing in 2017 and beyond. This has been one of the main reasons the property market hasn’t crashed in 2016 – less properties listed (so a lack of supply).
- Politics? Not really. However, policies around negative gearing etc. may have an effect on real estate. There is little chance of changes here though.
And the less obvious ones…
- Access to loans. With an ASIC review of broker remuneration, one of the whispers is that they will overhaul how brokers are remunerated. Probably not a bad thing. However, by “fixing” this issue, ASIC may inadvertently destroy the lenders’ largest distribution channel (brokers account for more than 54% of all lending). Any mass exodus of brokers will mean long queues at your local bank branch and banks restricting lending to cope with existing demand. Our call is that there will be some changes but not a fee for service model. It won’t work with mortgage brokers as it has with financial planners — borrowers won’t pay it if they have access to an alternative.
- ASIC’s inquiry also extends to the entire financial structure of institutions. Another (very loud) whisper is they may look at finally forcing the dismantling of the vertical integration model banks (and others) have deployed over the past few decades to dominate the mortgage market.
- The X factor. We don’t know what it is as yet but every economic cycle appears to have one. Some unforeseen event that has either a positive or negative impact on the global or local economy.
- The global financial market. Believe it or not, eight years since the GFC began, we’re still not out of the woods. Sure, there’s been a rally in the US but Europe is still a basket case. We’re not sure if more countries will join the UK in exiting from the Euro. Then there’s China. If anyone tells you they know what’s going on in China, run. I’m not certain even the Chinese know the full extent of pressures on their own economy. They’ve never been here before so there’s no precedent. The point is that any rally in the stock market will take away funds that are currently destined to go into the property market. This will have a profound impact on demand (from investors) and is likely to force property prices down.
As always, I’d be interested to know what others think. Let us know what has impacted you in 2016 and/or what you think the impacts on you will be in 2017.