Lately, the news is flooded with stories about tightening credit conditions and the varying effects this may cause. At Home Loan Cash Back, our aim to to keep you informed so you know what to expect and why. Of course, this is general advice only and designed to give you some context around the credit crunch.
What is a Credit Crunch
It is when the banks and general lending market tighten up lending criteria. Lending and the financial markets usually follow cycles and have done for many years although a lot of consumers have never experienced the downside of a financial cycle so can be shocked when the credit world changes.
A credit crunch usually leads to less money being loaned to prospective borrowers which has a knock on effect in the overall economy. Consumers have less access to money for buying property, getting into investments and other investment purposes. This results in a slower property market which can change the “supply” vs “demand” balance with property supply. When credit is readily available, “demand” is usually higher which puts pressure on “supply” leading to strong growth in the property market. this is what the country has seen for many years now, in fact so much so that most of us have forgotten the last time things were not so good.
We can also expect a number of knock on effects being less new homes, builder slowdown, less stamp duty and increasing unemployment as a result of the economy struggling to balance itself with less money floating around in the system. This is essentially a credit crunch.
How Did This Happen
The truth is that the credit crunch has been slowly building now for a few years. APRA, the banks main regulator, instigated some very clear and firm rules with all regulated banks some time ago. These rules were harsh and sudden with the aim being to put the brakes on the Sydney and Melbourne property market accelerating too fast. APRA advised banks that they could not grow their overall investment lending by more than 10% year on year. This led to absolute chaos in the market with banks making so many changes that consumers could not keep up. Investment rates shot through the roof and banks started to segment owner occupied and investment lending.
The second layer of APRA changes came in around a year ago where banks were told that they could not have more than 30% of their overall residential lending on interest only lending. This also led to a flurry of changes with the banks where rates started to increase again. Consumers asking for a combination of both investment and interest only lending were the least attractive customer generally to the banks.
Finally, with so many reviews across the financial sector including am ASIC review, ABA Review and finally the ongoing Royal Commission, the banking sector has not had a chance to re-balance itself. More importantly, you the consumer, are flooded with scare stories of people losing everything and the forthcoming property bubble popping. this fear and all round chaos is adding further fire to a blaze already well it
What is Going to Happen
Let’s be honest, no one can predict the future and we are certainly in new territory from a financial sector perspective. What do we believe are the things to watch out for?
Property prices will fall – whilst we do not believe there will be a property crash, we do believe property prices will fall by as much as 10% – 20%. Why? Well, when it is harder to obtain credit, less people are able to buy property. In fact, the biggest risk with the APRA changes is to the thousands of regular middle income households who have managed to accumulate one, two or even more investment properties over the last decade or so. These consumers will find themselves coming out of interest only lending terms and with the new rules, they may not be able to extend the interest only lending. This will leave families stretched in paying principal & interest repayments that stretches their budgets. Many will choose to sell and others will have to sell. More properties for sale increases supply which lessens demand.
Another impact on lending criteria is the increased focus on what people actually spend their money on. This is what the banks called Customer Stated Living Expenses (CSLE). Traditionally, as banks assess home lending on an assumption of rates being on between 7%- 8% which gives a buffer to assessment criteria, banks usually accept what is called HEMS or HPI data for what people live on. These figures usually come from Government data related to what the minimum is for people to actually survive on.
Let’s be honest, if you are a family of two adults and two children, your living expenses are more than around $2,000 per month. so, with the increased focus on CSLE, banks are often going through customers’ bank statements with a fine tooth comb to ascertain expenses unless they believe they have been correctly disclosed initially. This CSLE focus along, the 7%- 8% buffer along with the changes to investment and interest only lending will all have a compounding impact on the markets.
Ultimately, you need to think about how you can take the step that’s most effective for you financially. Some savings accounts offer opportunities for tax-free returns that you can benefit from for a long time.
How Can I Survive the Credit Crunch
An old phrase comes to mind which is “Knowledge is King”. Being aware of what is happening and why allows you to better prepare. When you know something is happening, you can take action before it gets too bad.
Make changes to your budget – are you spending too heavily and not in control. Many of our valued customers have read the Barefoot Investor book which we believe gives great insights into segmenting your cash flow. Reigning your spending in will give you more money in your pocket to survive the credit crunch.
Sell early rather than late – if you know that you are going to have to sell property or other assets to survive the crunch, don’t bury your head in the sand. Take action now and benefit from cashing in on the profits before they diminish or even turn into losses.
Take charge of your finances. There are a number of things you can do. Refinancing your home loan is one of them which can often put thousands back into your pocket each year. Of course, ensuring you go through Home Loan Cash Back ensures you get a great deal and 100% of the trailing commissions for the life of the loan. Be smart, take charge and use the system to your advantage.
Protect yourself – make sure your income, property and life is protected. Your home and your health are the biggest assets in the world so make sure you protect them.
Remember, one person’s failure is another person’s success! Stay ahead of the curve, take charge and be the one ahead not the one who gets left behind
We hope you found this useful and the team at Home Loan Cash Back is always willing to chat to anyone needing some general advice