Property prices can be like an unexpected drought for small business

Property prices can be like an unexpected drought for small business opportunity


By that time house prices in Melbourne’s inner south may have fallen further than 10.5 per cent, and the banks may have reduced the loan to value ratio from, say 85 per cent, to 70 per cent.

What happens then, when the business can’t get a new loan? Ask a farmer who has done well historically but suddenly has four years of unforeseen drought.

Farmers who received government subsidies during drought – usually in the form of cheaper loans – are told by the economic rationalists that they should have foreseen extremities in the weather and organised their capital to handle such extremes.

A similar argument could be mounted against a car tyre business owner – why couldn’t they have foresee the collapse in house prices they use their home as collateral?

“I generally don’t like these things – banks make loans based on judgments of where the risks are. I prefer the private sector determine that rather than the government,” says economist Stephen Koukoulas.

 Daniel Munoz

Hard to predict markets

The majority ofAustralia’s economists couldn’t accurately predict the fall in house prices eitherso you couldn’t really blame a small business – just as it’s hard to blame a well organised farmer for not predicting the weather.

Worse, if the small business owner, having seen the extraordinary rise in value for homes over the past decade, expanded the business and took on more debt only to see the value of houses start to turn the other way.

Now, without a loan or much higher costs for that loan, the business might have to pull back on staff and capital investment.

If that contraction plays out on a large scale it can seriously injure the economy.

This is where the government’sAustralian Business Securitisation Fundhas stepped in – to provide loans for small businesses where banks won’t go. Treasury’s Australian Office of Financial Management (AOFM) will invest in pools of SME loans in much the same way that it did under a federal Labor government, when it bought almost $16 billion ofresidential mortgage-backed securities (RMBS)to keep alive non-bank home lenders during the 2008-09 financial crisis.

The question is whether this kind of subsidy should be given in the first place.

Economist Stephen Koukoulas says it doesn’t sound right.

“I generally don’t like these things – banks make loans based on judgments of where the risks are. I prefer the private sector determine that rather than the government.”

But there is also a risk that the banks are overcooking the risk and protecting themselves from legal claims post-royal commission.

And there is always the argument too that its better to subsidise people who are willing to work and take risk than those that can but don’t.

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