Non Bank Lending Still Holding Up

During the GFC, the Australian financial market lost almost all of its non bank lenders. The traditional banks moved from 70% to 90% of the residential construction lending market. Capital was severely constrained which led to a major property industry downturn. This time it’s different.

Prior to COVID there was little doubt that some non bank lenders were providing loans with unrealistic provisions for uncertainty. This meant they were not appropriately pricing risk to build their loan books. COVID comes along and some will be casualties of their doing.

But the Government/RBA did some swift movement at the front end to avert a major capital crunch. They helped recapitalise some of the securitised residential mortgages (such as Resimac and Firstmac) to ensure there were no defaults in the securitisation market. The Banks, that were still on the back foot from the Hayne Royal Commission, agreed to defer loan repayments for some businesses and some mortgage holders. These two initiatives alone made a material difference to the industry and without them far more pain would have been felt by now.

Importantly, we still have a relatively strong non bank lending sector. The sector is nowhere near as prominent as in other countries but they have got out of this far.

In our work with the sector, it is apparent that funds are not as available as they once were and risk has been repriced. But investors are slowly coming back to support the loan books of the non bank lenders. This market segment will be important as they don’t have the pre sale requirements or LVR’s required from the traditional banks. But the property developer pays a premium for this.

This still has a way to play out - but so far so good. Property developers could shop loans around prior to COVID and they will probably continue to do so. The issue is that there has been a slight tightening of capital and what they were expecting pre-COVID is probably no longer available.