Falling house prices could make it harder for SMEs to access credit, one lender has claimed, as property values in Australia’s largest cities head south.
Despite NAB’s recent commitment that it would not “back off” SME lending despite an anticipated $40 million hit from the royal commission, Greg Charlwood, managing director of Australian Invoice Finance (AIF), said that falling property prices in 2018 could impact lenders’ ability to raise funds, in turn pushing up the price of borrowing.
“The average value of Sydney houses has fallen 3.4 per cent over the past year. If this downward trend continues as borrowing costs rise and APRA demands tighter lending standards following the royal commission, small business owners may regret using their home as a bank and mixing their personal and business lives in this way,” he said.
“With interest rates widely expected to rise, servicing the cost of a business loan on a residential property will increase, reducing business revenue yet the business owner may not be able to borrow more if he or she hits a tough spot and needs more working capital.”
Mr Charlwood added: “Business is uncertain enough without the added worry of whether you will have credit available when you most need it.”
Latest data from property firm CoreLogic revealed that national house prices fell by 0.5 per cent in the March quarter, with capital cities leading the falls.
After years of double-digit growth, Sydney property has already fallen by 3.9 per cent from their 2017 peak. Melbourne, Adelaide and Canberra have all seen more modest falls, down 0.7 per cent, 0.4 per cent and 0.2 per cent respectively.
Perth and Darwin have seen prices plummet in recent years following the end of the mining boom, down 10.8 per cent and 21.6 per cent respectively.
For those struggling to understand why property prices are so strongly linked with borrowing costs, consider that the value of Australian property currently sits at $7.5 trillion – meaning that even a modest fall in values equates to substantial monetary losses.
The Reserve Bank kept interest rates on hold in May, as anticipated by the majority of economic commentators.