Interest Rates

• Going up another two / maybe three times within the next six months

Possible Actions -

• Consider fixing all or part of your loan

Call us to ensure your current loan is still competitive

Housing

• Housing affordability will drop further


• Rents will continue to rise


• Houses tipped to increase a further 12%


• Shortage of land will drive prices up further


• Many infrastructure projects will drive up prices further

Possible Actions -

• Consider buying property


• At least get a 'pre-approval' to know what you can afford

Lending

• Will become considerably harder to borrow for the self employed


• Will be even harder for builders / developers to borrow for personal and business


• Lenders will be less tolerant with late payments and defaults. Quicker to 'sell people up'

Possible Actions -

• Set up access to all equity as soon as possible


• Pay off all non deductible debt ASAP. eg. credit cards


• Consolidate your debt and lower over all repayments

Construction

• Supply of housing will continue to fall significantly beneath demand


• Become harder and harder for small / medium builders to get funds to build
  
  

Possible Actions -

• Arrange construction finance as soon as possible as it may not be as freely available in the future


• Assess your business borrowing ability ASAP

Summary

• Melbourne is the most affordable city in Australia


• Population explosion (will overtake Sydney by 2028)


• People living longer, living alone and high migration levels


• Great time to invest in property - capital growth and rentals will be high!


• Start watching the retail figures as the first sign of the 'tougher times' coming as people


• stop discretionary spending first.


• 'Baton down the hatches', start budgeting and review your finances ASAP

BUT:

• Interest rates increasing


• Petrol prices rising


• Building costs rising


• Money harder to borrow


• Lower affordability for first home owners


• Higher rents

Warning!!

Warning - please be careful if you are in outer Melbourne suburbs with poor infrastructure. (many housing estates)

This is because usually, these areas have:

• Very low equity in their properties


• Middle / lower socioeconomic working salaried people


• Will be also be hit with multiple interest rate increases


• Will feel the higher petrol prices more due to no alternative methods of transport and further to travel each day to work


• Traditionally fill their homes with zero interest furniture, plasmas, etc and then incur hefty penalty interest rates if they don't repay the amount when due.


• More than 50 repossessions per week. Half of all claims involved owners who had their homes for less than 2 years.

Harry Pontikis, Director of Chocolate Money and Manager of Master Builders Financial Services explains what impact the volatile stock market andUS Sub-Prime upheaval will have on the Victorian building and construction industry.

Last Week, Harry Pontikis and Brian Welch (Executive Director of the MBAV) met with various representatives of the Treasury and Finance departments to discuss their concerns for builders and the self employed in general over the forth coming housing and funding crisis.

Do we have Sub-Prime loans in Australia?

In Australia, we have good lending practices, and so we do not have Sub-Prime loans. But, there are loans available which do not conform to a bank's standard lending criteria, called non-conforming loans. These loans are funded from American Sub-Prime money and are usually accessed by self employed people. While non-conforming loans only make up two per cent of the general Australian loan market, almost 46 per cent of small to medium builders have a non-conforming loan.

There are a few reasons for this:

• Builders often have difficulty obtaining conforming loans as they are usually employed on a contract/per-job basis;


• Many builders are self-employed and may not receive documentation such as payslips;


• It may be difficult to collate all the information of the various entities in a timely manner - like companies and trust structures; and,


• Accountants are often not able to provide all the financial information in a timely manner to the bank's satisfaction when builders require new lending facilities.

What does the US Sub-Prime meltdown mean for your business?

Essentially, what this means is that the pool of cash which is usually available for borrowing is becoming smaller. As a result, accessing credit is
becoming more difficult. Many banks are becoming tougher with their lending criteria, and many non
bank lenders are going out of business because they cannot secure funds.

While Australia's non-conforming loan sector is only small and our lending practices are tight, the lack of available credit in the global market has started to affect us.
2008 is forecast to be a sound year for the Victorian building and construction industry. In the event of unforeseen changes, securing your finances now will ensure that you are better placed if credit market conditions deteriorate later in 2008. Make sure your business is sensibly placed by researching the financial options available.

What is Sub-Prime?

Sub-Prime loans are loans which do not meet the standard lending criteria, and are sometimes lent to people with a deficient credit history. Sub-Prime

lending can be quite risky, as the borrowers' ability to repay the loan is often in doubt.
Sub-Prime loans have also been given to borrowers at discounted rates or 'honeymoon periods'.

Unfortunately, when the honeymoon period ends and a higher interest rate comes into effect, some borrowers have not been able to keep up with the repayments and have defaulted.

What is the issue?

During 2007, a large number of Sub-Prime borrowers started to default on their loans, causing many institutions and lenders to become concerned about those loans which are yet to come out of their honeymoon periods. Investors decided the risks were too great and stopped providing funds for Sub-Prime lending. This is the reason why there is so much turmoil in the US.

How does this effect Australia?

Most banks and lending institutions borrow funds from overseas to lend to Australians for home loans, buildings or business purposes. Due to the size, cost and dynamism of the American economy, the bulk of these funds are sourced from there. Funds from the US are often lent to Australia for very short periods of time - sometimes only 90 days. Once that 90 day limit expires, the Australian lenders must reapply to borrow the money again for another 90 days (rollover). The problem facing Australia at present is that when our lenders have tried to rollover these funds, US investors have indicated that they are no longer willing to lend them the money.

"Australian economy not immune"

"The Australian economy is well placed to withstand turbulence in international markets," Treasurer Wayne Swan says. "But it is not immune to volatility in the United States' economy." "All the advice I am receiving is that we are well placed to withstand that international turbulence," he told reporters in Canberra.

Our advice

With access to credit becoming harder and interest rates forecast to rise, now is the best time to reassess your personal and business' financial position. Many loan products which are now available may not be around in the coming months.
Therefore, call Master Builders or Chocolate Money to discuss your situation, what options are available, and how to structure your debt to ensure you are in the best position to endure the oncoming economic changes.

Builders are going to have a double impact due to borrowing money personally for their own homes, as well as needing money to build and develop.

The slump of the Australian stock market

Recent events on the Australian stock market have wiped nearly $100 billion off the market.
This is the biggest drop for almost 20 years. While this volatility is worrisome if you're a short term
investor, crashes and spikes are a normal part of the global trading system - so don't panic!

Despite the volatility, there is some good news. Australia's economy, as well as the economies in our region, are quite strong and are forecast to weather the storm better than our American and European counterparts. There is the potential to make a tidy profit during these uncertain times if we plan our personal, financial and business matters responsibly.