$100 Billion of Savings Looking for a Home

This article appeared in the Australian Jewish News on 20 November 2020.

As Melbourne crawls out of its second COVID-19 lockdown and joins the rest of the nation in enjoying some of the liberties we used to take for granted, a strange phenomenon has been occurring in our banks.

Data from the Australian Prudential Regulation Authority (APRA) reveals that Australians squirrelled away another $16 billion in September. Since February we have saved over $100 billion, with $55 billion saved from July to September.

In contrast, Commonwealth Bank deposits fell by nearly $3 billion over the same period last year, according to the Australian Financial Review.

APRA attributes the increase in savings to JobKeeper payments and tax refunds. Mortgage repayment deferrals, increased government assistance payments and the release of over $30 billion from superannuation accounts have also contributed to this run up in savings.

Almost all of these funds earn a rate of interest below inflation, with most attracting a rate of zero.

Reserve Bank of Australia deputy governor Guy Debelle recently informed a Senate Estimates hearing that the COVID-19 national recession is now technically over as economic declines in Victoria appear to have been more than offset by growth elsewhere in the nation during the September quarter.

As Victoria joins the rest of the nation, many investors who had been saving for the past six months will look to redeploy their funds.

But how will investors approach this investment decision given the continued economic uncertainty?

We are, after all, coming out of a period like no other in our recent history.

The share market will attract its share of funds seeking medium-to-long-term growth, but recent events have shown generating stable income from listed stocks can be difficult.

The ASX’s most popular income stocks – major banks and infrastructure shares – have cut dividends and their outlook remains unclear.

Direct property investment and listed property trusts will remain a challenging landscape as some commercial tenants struggle to pay rent, putting further pressure on historically low rental yields.

Bank accounts and term deposits are effective ways to store and protect value but they are next to useless in generating income.

Against this backdrop, private mortgage investments, which have been steadily growing in popularity as the industry matures, is likely to see its recent surge in interest continue.

Private mortgages generally offer investors seven to 11 per cent returns secured by first-ranking registered mortgages, and higher returns for second mortgages.

Accessing high-quality transactions is critical to mortgage funds and private lenders. “We work to find our investors the right projects to lend on, and the right developers to partner with,” said Bowery Capital co-founder and director Vann Fisher.

According to Fisher, investors like the combination of first mortgage security over property, reasonable gearing levels and competitive interest rates.

“Our job is to turn a series of one-off developments into a stable income stream that investors can rely upon,” said Bowery Capital co-founder and CEO Adam Smyth.

As Australia’s economic recovery from the COVID-19 recession gathers momentum, expect private mortgage investing to capture more than its share of the $100 billion of idle cash deposits languishing in interest-free bank accounts.