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.