Funding, Legal

Property market dip set to impact start-up funding

StartupSmart /

Start-ups looking to their banks for funding could be left disappointed after new figures showed that the property market is set for a poor year, with prices forecast to drop by as much as 7% in major capital cities.

 

Such a result could mean trouble for entrepreneurs who plan to borrow against the value of their house, with MGI Melbourne principal Sue Prestney tipping that banks would be less likely to lend as much if property values fell significantly from where they are now.

 

“Usually the bank lends something like 65% of the secured value. As that value drops, clearly the loan to value ratio drops, so they try and reign in the debt. That is a concern.”

 

“This happened during the GFC; the property market fell particularly in commercial property. Such a situation is bound to put pressure on debt that is financed on property.”

 

Prestney also says entrepreneurs may be in for some trouble as banks have been leaning towards bricks and mortar financing recently.

 

“When you have all these figures and predictions coming on, the banks will err on the side of conservatism.”

 

The SQM report comes after the Reserve Bank yesterday decided it would keep interest rates on hold at 4.75%, fuelling speculation the housing market would see prices remain flat through the spring selling season.

 

SQM Research says prices will fall in all cities during the 2011 calendar year, with Perth and Canberra likely to see the biggest declines.

 

The best-case scenario the research firm puts forward is that there will be no change in the official cash rate over the next year. If that were to occur, Brisbane, Darwin and Melbourne could see prices fall by as much as 7%.

 

Adelaide would see prices fall by 6%, while Hobart and Perth prices would be hit by 4%. Sydney prices would remain flat, while Canberra would actually see an increase of 4%.

 

This would mean that from SQM’s designated peak period of March 2010, Brisbane, Darwin and Melbourne prices could fall by as much as 15%.

 

The case is even worse if a 25 basis point rate hike is taken into account. If such a hike were to occur, SQM predicts that prices in Darwin and Melbourne could fall by up to 9%, in Hobart and Brisbane by 7%, in Perth and Adelaide by 8%, and in Canberra by 5%.

 

“This forecast assumes that rates are on hold. Looking at the most recent indicators such as the stock market, housing finance approvals, overall affordability and consumer sentiment, this all informs it.”

 

“This all suggests to us that house prices are likely to continue to fall from this point, and we’re not seeing any change in this trend at this point in time.”

 

The SQM Boom and Bust Report claims that higher interest rates are to blame for falling house prices. “After four official interest rate rises in 2010, confidence in the property market (and the greater economy) has been quashed.”

 

“While long-term property gains are likely, the short-term outlook is for further weakness.”

 

Christopher says the outlook is a disappointing one for existing investors. However, for first time buyers, the timing couldn’t be better.

 

“For potential home buyers that haven’t emerged into the market yet, 2012 should be relatively easy pickings for them. There is no rush to get into the market right now, and it can wait.”

 

However, the situation changes once a rate cut is taken into account, which many economists are now viewing as more of a likely scenario if global volatility continues.

 

The Boom and Boost Report states that if a 25 basis point rate cut occurs next year, price declines will be contained and some cities will record increases.

 

If that scenario occurs, prices in Perth and Adelaide will remain flat, while prices in Brisbane, Darwin and Melbourne will fall by 2%. Prices in Sydney, Hobart and Canberra will record increases of 2%.

 

“Anything can change between now and then, but the biggest change would certainly be a cut in interest rates. That would change the outlook, and that’s a whole different scenario.”

 

“I think it’s fairly likely we could see a rate cut at some point, if we see consumer spending in the doldrums, if unemployment rises. We also have a very weak government right now, and that doesn’t help sentiment.”

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