As industry regulators crack down on credit providers and make conventional investor related property loans tougher to come by, an increasing emergence in alternative funding, facilitated by technology, could portend a very different lending trend.
The Internet is a wonderful modern resource, which some would argue is largely under-utilized when it comes to evolving the way we interact with and transact housing, as both a place to live and a commodity.
But as the generational baton is passed from the baby boomers to their more tech savvy offspring, we’re seeing the emergence of a new digital age.
Young people are recognising the opportunity to assume greater control over their own financial destiny, with an increasing number of crowd funding and peer to peer (P2P) lending initiatives emerging across the information superhighway.
Now it’s possible to become a property developer within your SMSF for instance, contributing a nominal amount of money into a collective fund, which is in turn used to bypass bank lending and develop residential housing for profit.
We were promised a ‘brave new world’ of infinite possibility with the onset of our new digital age, and it seems that for investors exploring potentially different methods of funding, it’s finally arrived!
Of course with the handful of majors in Australia still holding a 95% plus monopoly over our four pillar-banking sector, it’s unlikely the traditional methods of obtaining a property mortgage will be entirely replaced in our lifetime.
But the prospect of some much-needed competition in the lending arena – that could conceivably come from ‘everyday investors’ – is an exciting possibility, and one worth exploring further.
The crowd-funding craze
Not for profit organisations have been forced to innovate or die a natural death in recent times, with governments increasingly tightening the budgetary purse strings post-GFC.
In response, we saw an emergence of online crowd funding platforms earlier this decade, in a bid to create a more direct transfer of capital – from those who had money to give, to those who most needed it.
Sites like gofundme.com have since taken off in a big way, providing everyday people and charities with the financial capacity to connect directly and effect change that might not have been possible via conventional, money raising initiatives.
The premise is simple – if you want to donate to a cause, you can jump online, find something worthy and provide direct, immediate funding.
This begs the question…could property investment be facilitated in a similar way?
Banks set to get a $20 billion dollar run for their money
According to a recent Morgan Stanley report, Australia, China and the UK are emerging as front-runners in global peer-to-peer lending, with the potential to capture around 8 per cent of the unsecured consumer finance market by 2020.
P2P lending is gaining popularity with entrepreneurial types as a faster, more convenient and cheaper way to access capital than traditional methods, which still rely largely on what many would consider ‘stone age’ paper pushing.
A growing number of commercial lending platforms are being developed to operate in the online and mobile banking environments. And given that Australians love our mobile technology even more than we love bricks and mortar, Morgan Stanley says ours is fertile ground for P2P lenders.
Additionally, the big four players have historically neglected Australia’s unsecured personal and business lending markets, where higher margins allow for aggressive price competition.
“We believe that margins in unsecured consumer lending have expanded more since the financial crisis than in any other major product segment,” the Morgan Stanley report stated.
Then of course there’s our new stricter credit reporting laws, making it easier for P2P lenders to assess a loan applicant’s capacity to repay.
A new approach for a new age
Morgan Stanley estimates the combined value of unsecured consumer debt in Australia to be in the region of $101 billion, with the “addressable market” for P2P lenders around $75 billion.
Up until now, the focus of P2P lending has largely been in the unsecured SME market, which is worth around $72 billion.
It’s anticipated that both sectors will grow considerably by 2020, with P2P lending set to capture 8 per cent or $10 billion of the total addressable consumer market by 2020 and 12 per cent of the SME market ($11.4 billion).
The report points to a few potential flaws with the future expansion of P2P lending however, with a greater need for strategic alliances to more efficiently expand distribution, achieve scale and acquire customers.
Further, it warned that current platforms are largely untested; with questions regarding the regulatory environment and underwriting processes for P2P established loans.
Of course we have a very long way to go before everyday folk like you and I are no longer at the mercy of the big banks when it comes to our financial portfolios.
But developments like these do hold promise for change and importantly, alternative and potentially more flexible ways for Australians to assume greater control over our self-managed investment funds, with the secure diversity of bricks and mortar.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).