Leading lender says brace for recession, prepare for take-off in 2024

One of Australia’s foremost financial advisors has warned Australians to brace for a recession but prepare for a property market that will rebound strongly in late 2024.

Mark Bouris, Chairman of Yellow Brick Road Group and a Member of the Order of Australia (AM), on Tuesday (28 March) told attendees of the Urban Development Institute of Australia’s National Congress 2023 that the Reserve Bank of Australia (RBA) will not stop its cycle of interest rate rises until inflation is tamed to at least 4 per cent.

In a wide ranging keynote speaker address in Perth, Mr Bouris also said that lenders, including the big four banks, are discounting their loan offerings to the point where they are surrendering any profit from the customer.

He said Yellow Brick Road, which has a loan book worth $50.9 billion, had seen new business plummet since Covid as lenders were left to squabble over refinancers and cling on to existing customers.

“For every 2 per cent that the retail lending rate goes up, we’re going to lend 20 per cent less,” he said.

“Where we were doing something like 80 per cent new business during Covid, that’s now around 55 per cent with the balance just being refinancing.

“I have never seen in my 35 years in the industry, a more competitive environment in terms of mortgage pricing.

“Most of us are lending at cost and making no margin, bank margins are shrinking and that’s all because we’re competing with each other, a lot of times lending money and making no margin but doing so to build up our inventory of mortgages to retain market share.”

This competitiveness provided borrowers with the chance to negotiate a discount on the variable home loan of around 1 per cent, he said.

“Right now many fixed rates are leaping from around 2 per cent to 5.5 or 6 per cent but borrowers in that situation can push for a 1 per cent discount to save some money.

“I know I would rather give someone a 1 per cent discount on our product than lose them and try and go find a new borrower, because I’m already giving away one per cent in advertising and other costs in luring that new borrower,” Mr Bouris said.

“So the upcoming mortgage cliff is not quite as bad as everyone is talking about, as lenders will turn themselves inside out to keep an existing borrower.”

He said lenders were cutting costs and living off their old business and breaking even on the new, in the hope that the market and interest rates will normalise down the track.

“I can’t foresee banks and lenders sourcing their money more cheaply for a period of time, while we have this irrationality out there in the money markets.”

Recessionary fears becoming a reality

When it came to second guessing the RBA, Mr Bouris was adamant that more rate rises were forthcoming but said the big question was how long they would be sustained when they hit a peak.

Echoing the sentiment of former Prime Minister Paul Keating, who as Treasurer in 1990 famously described that era’s economic decline as “the recession we had to have”, Mr Bouris said the RBA Board was probably thinking along the same lines even if it would never utter the words publicly.

“I think we will end up in a recession … and that the unemployment number will have to push up to 4-plus per cent to take that pressure off price-wage-inflationary pressures, and to get the narrative to shift so that it’s no longer about inflation anymore, it’s about recession.

“The RBA have to break something, and that something is spending.”

Mr Bouris was on stage delivering this message when the Australian Bureau of Statistics released its latest retail sales figures, which were still rising, albeit less than last month’s big uptick.

Retail turnover rose 0.2 per cent in February 2023, which follows a 1.8 per cent rise in January. The day after this speech was delivered, the ABS revealed the Consumer Price Index had eased back to 6.8 per cent to end of February 2023, down from 7.4 per cent the previous month and the December peak of 8.4 per cent.

“Realistically, there is only one way to control inflation and that’s to push us into recession.

“When that is the discussion, people will stop spending.

“When the recession hits we’ll stop spending; the good news is if you know this, then there’s an opportunity.

“Australia’s economic history is that these tightening periods and downturns, generally speaking, only last between nine and 15 months.

“My gut feeling is that somewhere between here and June next year, we’ll see one, two maybe more rate increases, and a recession – not something anything like the 1930s but the narrative will be scary enough to change behaviour.”

Westpac, he said, envisaged that from late 2024 there would be seven interest rates cuts.

“That means the growth period will start again, so plan to knuckle down, tighten your belt and get ready for a tougher period, make sure you have access to funding, maintain cash, reduce your costs and get ready for things to kick up – and kick up fast – in late 2024.”