How alarmed should we be by the news that nearly one-third of home loans have been obtained by home buyers who told fibs to secure the loan?
From one perspective, not much. Some of the documents required for a standard loan – estimates of self-employed income, living expenses, statements of other liabilities and assets – can be stretched a bit.
But the bank’s major question is whether the borrower can service the debt.
At the present time, the answer is overwhelmingly ‘yes’. While $500 billion of Australia’s $1.6 trillion mortgage market might be a bit dodgy, mortgage-arrears and default figures are still low.
Furthermore, since property values have soared in recent years, many borrowers have fat equity buffers on their home loans, assuming they have not been withdrawing equity hand over fist, as was popular in the run-up to the global financial crisis (GFC).
Back in 2006, the chatter around backyard barbecues was of rising home prices ‘paying for our holiday’, or ‘boat’ or whatever.
What wasn’t mentioned so much were the large equity withdrawals some business owners used to prop up their businesses.
Small and medium-sized businesses (SMEs) use various means to finance their investments and cashflows, but after years of house price growth, many entrepreneurs have become used to seeing their home equity as a finance safety net.
For example, a small transport firm owner might have bought a home 10 years ago for $500,000 – borrowing up to the 80 per cent loan-to-valuation ratio of $400,000 – but now might be sitting on an asset worth $1 million.
The bank will usually be happy to extend the loan upwards – possibly to the new 80 per cent limit of $800,000 – and hey presto, a couple of new trucks can be financed at low mortgage rates.
Using home equity in that way is not well accounted for in Australia. At the Reserve Bank it shows up in the residential mortgage data when ideally it would be counted as business investment.
Peter Strong, chief executive of the Council of Small Business of Australia (COSBOA), has alerted me to that murky issue many times since the GFC, and now says he’ll “watch closely” for signs that source of finance is under threat.
It could cause big headaches if it is.
A new survey from accounting software firm Xero shows that only 50.7 per cent of SMEs are currently cashflow-positive, meaning that the other half have to cover their losses from somewhere.
More importantly, lack of finance can stop a firm capitalising on new opportunities, such as those generated by the government-funded ‘infrastructure boom’.
That would be a great pity, because SME-led job creation is just what the nation needs right now. SMEs employ more than 40 per cent of Australian workers, and tend to be nimble operators who can invest and create new jobs quickly.
In the past few months that is just what’s been happening, according to the Xero survey. It shows that in June, SMEs increased their head count by 1.3 per cent, or about six times the economy-wide increase of just 0.22 per cent.
That’s great news, but will that continue if the opaque link between home equity and SME investment is crimped by slowing property prices?
Apartment gluts in Brisbane, Sydney and, to a lesser extent, Melbourne are already bringing softer prices, and one finance broker told me that capital values in many new, outlying suburbs of capital cities will flatline or fall in the next couple of years.
That could create a kind of Catch-22 for the nation.
If a full-blown property crash is to be avoided, wages and prices in the rest of the economy need to catch up – we need to ‘inflate our way out of trouble’.
SMEs should be at the centre of that process – investing, creating jobs, increasing demand for labour and creating upward pressure on wages.
But just as SMEs are supposed to be doing that, the back-up financing for that extra truck, digger, food van, coffee machine or shop re-fit may vanish into thin air – and with it, the jobs our credit-saturated nation so badly needs.