Credit Crunch Deepens for Construction Funding

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An indicator I look at to determine where we are in the credit cycle is average loan term.

When there is plenty of credit available, purchasers of the completed product have no difficulty getting finance and can settle in a short period of time. Any residue stock can be readily refinanced into a residual stock facility.

This reduces average loan term for construction funders like GPS.

Sales of end product are now being delayed due to the time it takes purchasers to put their finance in place.

Due to the tightening of serviceability rules by the banks, which has led to their pull back, there is now more competition for the limited amount of residual stock facilities currently available.

I am receiving more “Richard old friend and buddy” calls from borrowers whose bank rate residual stock facilities fail to materialise. When GPS has to carry some residual stock facilities, it also pushes out our average loan term.

Keeping a close watch on such indicators allows GPS to see what is happening, to be able to slow down new lending and continue to meet our existing borrowers’ expectations of quick turn around in the payment of progress draws.

It has also enabled GPS to continue to settle new loans.

I expect that many of the remaining construction lenders who are still in the market will experience a push out of loan terms. This will necessitate either a slowdown in lending rates or a cessation of lending until they sort out their funding cashflows.

This will only deepen the credit crunch.

Richard Woodhead – Managing Director

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