Alternative Lending Continues to Drive the Real Estate Cycle

Alarm bells started ringing for the Australian Securities and Investments Commission (ASIC) in late 2014, when the data started to show interest-only loans comprising 43% of all new mortgages.

ASIC responded quickly, with a review into interest-only loans.

They found that in 40% of cases reviewed, the affordability calculations were faulty.

Lenders were using the full term of the loan to calculate principal repayments, rather than the residual term. This assumed the borrower had longer to repay the principal on the loan than they actually did.

ASIC extracted a commitment from the banks to improve lending standards in this regard and to reduce the interest-only periods offered.

All lenders responded, advising ASIC that they intended to change, or had already changed their practices in this area.

It had the desired effect. Interest-only loans as a share of total mortgages fell dramatically. Interest-only loans with a term longer than five years fell by more than half to the end of last December.

Investor mortgages outstanding fell by 2.4% year-on-year, which was the greatest decline on record.

The tightening of lending left some investors compromised, and demand for alternative funding has allowed other lenders to fill the space left by the banks.

Michael Holm, executive chairman of Balmain Corporation, Australia’s largest non-bank commercial loan manager, says stricter bank lending rules has been good for business.

Balmain Corporation has a conservative low loan to value strategy with higher interest rates, but business has boomed as traditional lending sources dried up.

The timing also seems to be right for real estate crowdfunding specialist CoAssets Ltd [ASX:CA8], which listed on the Australian Securities Exchange earlier this month.

The Singapore based company is looking to replicate its business in Australia, and hoping to tap into the increasing demand for real estate development funding, after the regulatory clamp down on investor lending.

The company started in 2013 and has grown its user base from 200 to over 55,000 plus, attracting over 60 property developers from 11 countries.

CoAssets is a platform that connects investors with property developers that need capital.

Real estate developers put their projects onto the CoAssets website and investors see what they like, and can fund those projects which they believe in.

CoAssets main source of revenue is charging developers 3–5% of total funds raised.

The company does due diligence and research before anything goes on to the website. But once it’s on the website, it really is market driven from that moment on.

To date CoAssets has completed over $45 million worth of loans, with zero defaults. This is a result of the risk assessment model CoAssets use, which was developed with one of the Big Four auditing firms.

If CoAssets can continue to keep the default rate low, we might expect to see more investors chasing those higher than average yields going forward.

Investors can invest as low as $1000 and returns can range from 3% to as high as 16% per annum. These rates are set by the developers themselves, which decide what returns they give investors.

The company is attracting developers because they get fast access to loans rates below those offered by traditional lenders, while investors are receiving higher yields than for other debt instruments.

It’s a company to watch going forward. Perhaps not for the short term, as the company is breaking new ground. But it’s one to watch, see how it develops over the coming years.

Tightening of investor credit has not led to a property collapse, as alternative lenders in many cases have been capable of filling the hole left by the major banks. And with companies like CoAssets, we see new alternative sources of investment funding emerging.

Far from property collapse, the latest data suggests investors are returning to the market, despite the crackdown by regulators in the previous year.

The June quarter results revealed the value of investor lending has jumped 32.5%.

Interest only loans are back, rising by $7 billion. They now account for more than one in three new property loans.

It points to continuing housing price resilience.

That’s backed up by the latest data from the Australian Bureau of Statistics, which revealed house prices surged over the June quarter.

Sydney real estate is bouncing back after consecutive quarters of price falls in December and March, and with auction clearance rates back to record highs over September, it might be premature to call the end of the property boom in that city.

Analysts continue to call for property prices to fall. It makes for an easy headline, but they continue to get it wrong.

If we were to annualise the latest quarterly growth for Sydney and Melbourne it would be well over 10%.

This is all in accord with what we have been saying for some time at Cycles, Trends and Forecasts.

They say it can’t be done, but you can broadly forecast what’s coming next for property and the general economy.

That knowledge has been distilled into the Cycles, Trends and Forecasts 18 year real estate clock.

It’s handy knowledge to have, not only to time your real estate investments, but also to apply to the share market, to make better decisions on your investments. You can find out more about this investment advantage here.

All the best,

Terence Duffy,
Lead Researcher, Cycles, Trends and Forecasts

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia