The fall in property prices is likely to exacerbate the credit squeeze for small to medium businesses. Here’s what the property downturn means.
Assessing the latest Australian national accounts data is a classic case of glass-half-full: yes, the record-breaking run of economic growth continues well into its 28th year, but gross domestic product (GDP) growth in the September quarter – at 0.3 per cent, representing an annual growth rate of 2.8 per cent – was the weakest growth rate in two years, and a slowdown from the economy’s 3.4 per cent growth rate at the end of June.
Also, the result was weaker than the 3.3 per cent yearly rate expected by the consensus of economists’ expectations. The slowing in the economy was accompanied by further evidence of a property downturn, with the Australian property market recording in November the weakest conditions since the global financial crisis, with national home values down by 4.1 per cent over the year to November, according to research firm CoreLogic, led by an 8.1 per cent slump in Sydney and a 5.8 per cent decline in Melbourne.
Although not uniform across the nation – CoreLogic says Hobart house prices are up 9.3 per cent over the last 12 months, while the Canberra market is 4 per cent stronger – the housing slump represents a clear threat to the economy.
Outlook for small business
As such, the slump also represents a threat to the confidence of the nation’s small-to-medium-sized enterprises (SME), facing a combination of factors that are causing pessimism levels to rise, says Kate Carnell, Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
“Small business has started to feel much more pessimistic over the last two quarters,” says Carnell.
“There is an expression, ‘profitless growth’, and that’s where many small businesses are. Although they may have growth in their business, they may not have growth in profit.”
Carnell says small business has been hit by a “perfect storm” of negative influences outside its control: access to capital has dried up for some in the wake of the banking and financial services Royal Commission; payment times remain too long; power prices are up as a result of turbulence in the energy market; the economy and the housing sector are clearly slowing; and wage costs have risen.
Jarrod Ball, chief economist at the Committee for Economic Development of Australia (CEDA), agrees there has been a drop in optimism among SMEs, with the “big unknown” being whether the negative wealth effect of falling house prices affects household spending.
“We think that a fair part of the economic growth story is locked in, in the form of the significant public infrastructure spending, both federally and from the states and territories. That should be a boost to small businesses, because many of them are part of the construction supply chain,” says Ball. More people in jobs is also a positive, he says, but the potential for consumer spending to come down is a concern.
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Falling business confidence
Eroding confidence comes at a time when access to finance has become a “huge problem” for small businesses, says Carnell. “It hasn’t just happened since the Royal Commission, although it has got significantly worse over the last few months.”
Banks have tightened their lending standards, and in what “may be a case of unintended consequences,” she says, that has created stricter credit requirements around small business lending.
A property downturn may worsen this situation, given that most small business lending is still secured against the owners’ homes.
“We’re seeing access to finance lessening at a time when small businesses are being squeezed by power prices. We know of businesses which have had their electricity bill jump up by A$100,000 in a year, which is effectively eating their profit,” says Carnell.
Carnell says the federal government’s proposed business securitisation fund – which will provide funding to smaller banks and non-bank lenders to promote more competitive conditions in the SME lending space, and also the proposed business growth fund, are positive moves, and she also welcomes burgeoning fintech interest in business lending.
“We’re quite encouraged by what we’re seeing in the fintech space, for example, the challenger banks, the likes of Tyro and Judo are growing really rapidly in the small business lending space. That’s a mixture of secured and unsecured, but it’s actually more like traditional lending: they’re sitting down with small businesses and lending against their business plans and their forward cash flows and so on,” says Carnell.
Superannuation and lending
In 2019, she says, there are positive signs that the superannuation funds, particularly the industry fund sector, want to be involved in lending.
Industry Super Australia chief economist Stephen Anthony says lending to businesses holds “significant untapped potential” for super funds, which are in a strong position to help SMEs on both the debt and equity side.
Anthony adds, however, that super funds are not banks, and are not the panacea for the lending gap to SMEs. “We see the problem – that as a nation, we need to get capital flowing to SMEs to get innovation and productivity flowing – but we fall back on making them put up their house to get a loan. Our sector has the capital, and we want to put it to work, but we don’t have the skills to assess lending risk,” says Anthony.
The potential role for super funds could be to work with the banks, to let them identify high-growth businesses, and “come in behind that – on the equity side, and potentially on the lending side, too,” says Anthony.
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