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Property Prices Falling – Are We Headed for a Credit Crunch? (Demo)

Since the Global Financial Crisis (GFC) we have had global synchronisation to drive interest rates down and that has been extremely successful with free money under the Quantitative Easing (QE) label occurring throughout the world. Unfortunately, the game has changed and the days of QE are behind us. The days of QT or Quantitative Tightening are ahead of us and we believe it’s imperative to understand what this means going forward.

The term is often used – “normalisation of rates’ in reference to the fact that our rates are at recessionary levels. Normalisation refers to our rates getting back to the 6-7%, which for many people is 200 basis points (2 percent), higher than what they are currently paying. You will hear people say, “Well the Reserve Bank won’t allow that to happen”. Well the RBA may not have that much say. Being a global economy, the Reserve Bank’s control over the interest rate controls gets less and less as our banks borrow more money offshore to fund their lending requirements. This means the interest rate rises are imported regardless of what the Reserve Bank does. Just witness last week when CBA, Westpac and ANZ all increased their rates regardless of the RBA keeping rates on hold.

The second point is through APRA’s (Australian Prudential Regulatory Authority) intervention requiring banks to hold higher capital requirements, interest only loans have reduced by over 30% in the last two years with this trend to continue. This means that many people are coming off interest only loans and being forced into Principal and Interest Repayment arrangements as per normal home loans. This is all well and good but now with more stringent lending criteria thanks to the shenanigans witnessed at the Royal Commission, these loans will be prudently examined and payment terms will be when you retire. Gone are the days of getting a 35 year loan when you are aged 45. So the term of repayment has been reduced.

Couple this with Banks taking a dim view to apartment lending and the fact that they are actively vetoing certain suburbs which are over built and I raise the question whether we are not heading for another Credit Crunch and the possibility of a recession. I don’t wish to be an alarmist, but I cannot see any signs as to how property or for that matter Australian equities can continue to rise, at least in the shorter term – two to three years. The political debate, when we are not changing Prime Ministers, is how to increase wages. For that to occur we need top line revenue growth across Australian Business and associated productivity growth. This is simply not occurring. Our advice is be very careful.

Murray Wilkinson CFP
Authorised Representative of Future Gen Wealth Pty Ltd
September 2018

The information contained in this document are the personal views of the Author. This document has been prepared without consideration of any client’s investment objectives, financial situation or needs. Before acting on any information contained in this document, Future Gen Wealth Pty Ltd recommends you consider whether this is appropriate for your circumstances. While this document is based on the information from sources considered reliable, Future Gen Wealth Pty Ltd, its directors, employees and consultants do not represent, warrant or guarantee, expressly or implied, that the information in this document is complete and accurate. Future Gen Wealth Pty Ltd does not accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document.