There is so much noise in the media about the impacts of the Royal Commission on the Bank’s appetites and the resulting flow through effects to the property market that for some it can be difficult to know where the hype ends and reality begins. 

Much like our feathered friends in a coal mine, reading the early indicators are essential for survival in such a volatile market. 

As a short term lender, we consider ourselves having a rather unique ability to see incremental small changes that have the ability to become larger issues. Such is our vantage point where everything happens quickly and simultaneously. 

In our world, there are no 20 year set and forget loans so we are constantly assessing did we get this one right or what’s changed and then shifting gears for the next one.

For the finance market, this visibility allows us to see the reasons borrowers are getting turned down by the banks and the evolving metrics required to get a deal approved.

Our vantage point also extends to the property market where we are seeing developers struggling to get pre-sales, recession notices being issued as buyers either try to avoid under-water property purchases or where lower valuations mean buyers can’t come up with the shortfall.

Agents are telling us they are fearful of how quickly the market has turned and where it may end. Last weekend I spoke to an agent who had 4 properties put to the market by auction and not one buyer registered. “Worst market in 20 years” he tells me as he shrugs his shoulders and walks off. 

Over the last couple of weeks, there have been a few deals in particular that have tweaked our interest in terms of what may be considered the next phase in this cycle: 

1. A property investor with a long term banking history that had multiple properties on interest only facilities. The bank decided to revert them to P&I. He simply does not have the servicing capacity being an asset trader and had to turn to private lending. Stuck between a decision of higher financing charges via private funding or selling assets into the current property market the borrower chose the former. At a 35% LVR, this clearly was not a risk based assessment from the bank but policy driven. 
2. A corporate borrower who was told by their branch manager that the Bank is reducing their corporate book in the area / branch and that they need to refinance or amortise the facility. The mind boggles how that can ever be deemed a reasonable reason. 
3. A deal scenario we had reviewed 3 months ago and passed on has now come back across our desk to refinance. Since looking at the deal 3 months ago property prices have slipped 15%. The borrower is now over leveraged, the lender that did the deal is now stuck and the only way out is a property sale. Makes me think how many loans financed at 70% LVR are now closer to 80% LVR a number that typically can’t be refinanced in the private lending space.
4. A deal we funded this week as a bridging loan has been with one of the majors for almost 2 months getting passed around. After reading the trail of emails between the borrower and the business banker,  it's evident that the business banker simply had no idea what he can get funded anymore. How you could drag someone through a 2 month process and then say no is a sign of the level of uncertainty at the majors. 

What seems obvious to me is that borrowers no matter who they are, can no longer assume that their history and longevity with a particular Bank will be a ticket to a long life with the Bank.

There is a new breed of borrowers waking up to the world of private lending.

I would be interested in how other vantage points are seeing the current borrowing landscape?