The hidden victims of affordable housing

The Law of Unintended Consequences is always hard at work. What if an  extended period of subdued house price increases – the preferred path to more  affordable Australian housing – effectively wiped out a generation of would-be  entrepreneurs?

It was a possibility raised by the Reserve Bank's head of domestic markets  departments, Chris Aylmer, at a Mortgage and Finance Association of Australia  lunch in Adelaide. Aylmer also convenes the RBA's small business advisory panel  so perhaps is more attuned than most to that sector's particular funding   needs.

The possibility or question is based on the role sharp increases in house  prices played in providing the funding for new businesses in previous  generations: Get on the mortgage treadmill, watch the value of the house rise to  create equity that can then be borrowed against to fund a new enterprise, for  better or for worse.

Aylmer suggests the current generation of would-be entrepreneurs are unlikely  to be able to repeat the process.

For a start, higher house prices are a contributing factor for younger  generations delaying their first purchase, getting on that treadmill that  eventually provides the equity for a business loan from cautious banks. Then,  with credit growth remaining subdued and the outlook for house price  appreciation only a couple of per cent above the inflation rate, it's likely to  take considerably longer to build any sizeable equity anyway.

It's a bleak picture for the renewal of small business under the patterns we  have become used to. While there's plenty of credit available for would-be home  buyers, the banking industry remains wary of would-be business borrowers – start-ups without equity need not apply.

Asked if he had an answer to the problem he proposed, the central banker  confessed he did not, but the need for greater innovation in the space becomes  obvious as the traditional interaction between small business and financial  institutions changes.

He suggested that venture capital could play a greater role, that  intergenerational support could become a greater factor and that unsecured  lending might become more common – but that would mean more responsibility for  banks' credit officers.

Small businesses familiar with the finance jungle might suggest a bank credit  officer prepared to do unsecured business with a start-up is a very rare beast  indeed, yet low credit growth in banks' traditional hunting grounds should  encourage them to look for other prey. Maybe.

Similarly, low interest rates and the search for yield should theoretically  drive a broadening of venture capital's appetite.

As for the intergenerational – cripes, Gen Y's already been into the oldies  for the gap year, the first car and is still living at home, so what's another  call on the parental balance sheet?

A more optimistic reading of Gen Y's entrepreneurial skills would suggest  there are methods Boomers haven't heard of yet - crowd sourcing, capital-lite  business models, virtual thingies of one sort of another. But that takes time to  evolve while the traditional mainstay of small business funding hasn't been  functioning like it used to for several years now and isn't like to revive any  time soon. We now have a central bank on the record as being willing to “lean” against asset bubbles should they start to raise their ugly heads – the days of  double-digit house price rises are over. Glenn Stevens says so.

A gradual appreciation of housing without the danger of a bubble pushing the  RBA's blunt instrument into action, housing becoming steadily more affordable  relative to our income growth, they are nice things that we'd like to have – but  no good deed goes unpunished.

Michael Pascoe is a BusinessDay contributing editor who chaired  the MFAA lunch panel.

Source: WA Today