State of Play: Debt & A Second Wave

Hi, and welcome to our State of Play. Apologies for technical problems. That’s the problem with live stream as we feel our way in the new normal, but a lot’s happened since we last spoke. We’ve had Victoria now in stage three lockdown, and it seems to be a knock on effect or a domino effect, potentially. Fingers crossed it doesn’t happen into New South Wales with what happened at the Crossroads Hotel. And it’s going to be the nature of this thing until we get a cure or a vaccine, and it’s always been a problem. And hopefully, it won’t be too disruptive. But at the same time that’s happening, we’ve also got a whole lot of government stimulus that’s about to drop off a cliff. So, when we first went into reactionary mode, and as we know, there’s no playbook for this thing, the government just jumped to attention and the powers that be in the reserve bank and the Australian Banking Association, and they tried to do what they could, and they bought us six months breathing space. That six months runs out in September.

So, now that they did a blanket, just hold everything, wave a white flag, “Let’s just have a moratorium until we can assess the damage.” Now that they kind of know what’s happening and it’s less reactionary and panic stations, they’re looking at more tailored solutions. But once again, uncertainty, and just when you think you’re coming up for air and you can cope, you’re hit with a next wave of uncertainty. And it’s really really hard to plan, especially for businesses right now. But businesses are the backbone of this country. Especially small businesses, most businesses in Australia are small businesses, micro businesses, even sole traders. So, these one-man shows and smaller businesses with under 19 staff, it’s only the top 2% of businesses that have more than 19 employees what’s happened is our private sector is really dependent on our employees. Our nation of people with jobs are dependent on small business.

So, one thing happens in the economy. One state like Victoria goes into lockdown and it has a knock-on effect for everyone when everyone’s just struggling to keep afloat. So, what happened was this week, Josh Frydenberg has come out and said, “Okay, we know that jobkeeper and jobseeker, government stimulus packages that were more blanketed to support everyone, they’re coming to an end come September. And without them, we would have had 13.3% unemployment. Instead we’ve managed to moderate that and it’s 7.1%, which isn’t happy days. We shouldn’t be opening champagne bottles, but obviously it’s half of what it would have otherwise been. We don’t have the final figures. They’ll be announced this Thursday, the unemployment figures.

So we’ll watch that space. But the other scary thing, yeah. Is that job caper may not be a solution. So some case studies, and Peter Strong, the chief executive of the small business association of Australia has said, well, the problem is that if you’re keeping staff on jobkeeper, that may be okay for now. But if you’re going to go belly up or if you’re going to have to cut back anyway, in order to grow, like if you’re really going to have to streamline and you’re doing it tough, have a think about extending job key because it may call to further liabilities.

For example, one employer, so small micro-business had five staff. Three, he was able to keep working, two, he kept on jobkeeper. But all of the other benefits like leave entitlements, they all accrued. So if he wants to, unfortunately have to make their role redundant, which looks like what’s going to happen. He bought some time with jobkeeper to see the outcome back in lockdown. Again, doesn’t look like he’s going to be able to trade through it or it’ll be a very different streamlined business after that. He said, “Well, it’s going to cost me $39,000 in entitlements to terminate these people. I should’ve just done it right at the start.” So, they’re saying just reconsider. If your business is in trouble, don’t have a zombie business that’s artificially propped up. That’s just going to give you a bigger headache later on. We saw the bank say the same thing on Friday.

So, ANZ, Mark Han, one of their chief guys came out and said, “You know what? If you’re struggling with your property, consider selling it. Don’t dig yourself deeper and deeper into debt.” So, a surprising thing for a bank to say, but I think it’s damage control right now. And it’s time to come back to life. And instead of being supported artificially, people have to face the music. The day of reckoning is now. So, the other thing that’s happening that we just can’t pretend that we’re going to live happily ever after, even though Australia is relatively and comparatively doing better than other countries and we’ve got some outbreaks here and there, but we can contain them and shut them down and close borders and get it under control, especially with community transmission. So in other words, we are bringing it in from overseas. Our borders are closed, that we’ve got strict quarantine for Australians coming back from overseas.

But similarly, if it isn’t coming from overseas, it’s already here and it’s transferring from one person to another via the community. So, that’s what they’re trying to figure out at the moment. They knew that this would happen. They’re equipped to deal with it. But the bigger problem is, we are not just one state anymore. We’re not just, “Oh, look, we’ll only worry about new South Wales and new South Wales is okay. Pity the poor Victorians, but not our problem.” Victoria accounts for 25% of our GDP. So as an economy, we depend on Victoria to contribute to the bottom line. So something happens there, then it’s going to affect the rest of us. If it gets worse in New South Wales, New South Wales is a third of our GDP comes from new South Wales as a state. We’re also interconnected as a global economy.

So we can’t say, “Oh, pity those Americans, but we’ll be okay.” Yeah, we’ll be okay and we’ll probably survive. And we’ve got very very innovative like distilleries making handwash, we’ve got fabric companies making face masks and we’re able to cope and we’re able to be competitive, but change takes time. So we’re still going to be impacted. What’s going to happen is that, for example, America who have out of control with the virus, 60,000 cases per day. Now I know they’ve got a big population, 330 million, but 60,000 cases per day, 15,000 in Florida alone. So, they are still battling and that’s going to affect their economy big time. And they’re the largest economy in the world. Everyone else feeds off that. So if something happens there, as I say, if America sneezes, Australia gets a cold. Melbourne and the Victorian economy is a lesser, that could have happened to anyone, but we kind of did get complacent.

I’ve got to say I got complacent. It was like, “Oh, thank goodness. I can go to a cafe. I can go to a restaurant.” The kids in school holidays have been going to movies. And I’ve noticed at shopping centers, it’s really busy. People aren’t social distancing. But we tended to think, “Oh, well it was just a minor problem. They’ve sorted it out now.” And that’s not the case. So, we’re still not out of the woods. For example, Victoria alone, they’re going into six weeks lock down in stage three. That’s going to wipe $8 billion off our national economy. And it’s estimated 42,000 jobs in Victoria will be lost. The other issue when we flagged this last week is with debt. Business debt and mortgage debt. That is going to have to be paid. You have to pay the [Piper] Someday.

So the message out there initially was, “Don’t worry. If you can’t pay the bank, you’ve got an extra four months breathing space on top of the six months of loan deferrals.” But APRA said, “We can’t do that. That’s irresponsible.” So, now they’re monitoring their talk track. And it’s kind of like, “You know what? Tap out if you have to. Sell if you have to. Close your doors if you have to. It’s like the Titanic, we’ve got limited amount of life rafts here and it’s women and children and whoever can clamber on.” So that’s kind of where we’re at right now. So, APRA data show that 18% of small businesses worth $56 billion in loans to the bank have been deferred. They could be delinquent. The banks are telling themselves a bit of a lie. So, let’s look at it in terms of what we can relate to. Let’s say we’re a landlord and many of you are landlords. And you’ve got a property and your tenant stopped paying rent.

You can say, “I’ve got this awesome property. It’s worth X dollars. It rents out for $500 a week.” But if your tenant isn’t paying you $500 a week, it’s actually a liability. It’s an asset that’s costing you money and you’re not getting a return on it. And that tenant who’s not paying is actually squatting in that apartment or that house. And you’re needing to get them out. You need to get that asset performing for you. Same with banks. We think of banks and debt as a bad thing, but debt into a bank for them, on their books is an asset. It performs, it earns interest. So, they can cook their books for a little while. They can say, “Oh, well, there’s all of this debt, but we’re good corporate. We’ve deferred it and they don’t have to pay.” But it’s a ticking time bomb because they haven’t stopped the interest running.

The debt’s still accruing and it’s kind of a false sense of security for a bank to say, “Well, they owed me $1 million and they haven’t paid for a year, but they now owe 1.2.” It could be 3 million, it could be 5 million, pick a number. It doesn’t matter if they’re not paying and they can’t pay, it becomes the bank’s problem. So Morgan Stanley, for example, have come out and said many businesses in Melbourne, it’s not an isolated incident. If they’re forced to shut down for a second time and they never reopened, that means more people who will lose jobs, more businesses that’ll close and more mortgages that will be deferred, but ultimately potentially defaulted on. So, APRA, the Australian Prudential Regulation Authority, their numbers and data showed that more than 10% of home loan repayments, and the total net value of that is $192 billion, have been deferred or put on hold.

So they’re still ticking over. The debt is growing bigger and bigger and it may become the bank’s problems. Now, most of these are loans to investors. So, 34% of home loan repayments that have been deferred with distressed investors. In other words, it’s not their home, their principal place of residence. They bought an apartment in Melbourne CBD and they had it out for Airbnb rental because it was close to the shops or people wanted to fly in and fly out, they had a part-time job in Melbourne or they were commuting between cities. All of that has stopped. And all of those apartments, especially CBD apartments or close to the city and the capital cities are now not tenanted. So, 14% of repayment holidays are interest only loans. So in other words, they would just treading water, just making the interest repayments, not chipping away at the debt.

And 8% of deferrals went to mortgage holders who owed more than 90% of the value of the property. So, example, if it was a $1 million property, I borrowed 900,000 or more from the bank. And now I’ve put that on hold. If that’s going to accrue interest, I’m going to have negative equity pretty soon. If I put that loan on hold for 10 months and APRO have said come 31st of March next year, people will have to start repaying. By 31st of March, I’m probably going to owe the bank $1.1 million. And that million dollar valuation of the property may even go down. So, it’s a knock-on effect that will affect and impact our banks as well. So, the spike in investor deferrals will inevitably see a wave of distress properties hitting the market. We’ve heard it anecdotally, we heard ANZ come out on Friday and say, “You should start selling.”

I’m seeing even in our legal team with conveyancing, properties are being sold. Business has picked up, which you wouldn’t have thought. It used to be everything froze in March, April may. Once we came out of lockdown, there’s buyers getting bargained deals and sellers needing to move quickly. Martin North, who’s an economist and expert Digital Finance Analytics who measures these sorts of things and surveys and watches the market, he said that of 2.8 million investors, usually they invest through an entity like a company, of them, 830,000 are having mortgage stress. In other words, the amount coming in is less than the amount they need to pay. So, for example, in a city apartment, they’re not getting rent. The tenant’s not paying or they’ve moved out. But they still have to pay the levies, the loan, the overheads and outgoings on the property. And they’re falling further and further behind. The debt keeps adding up. 126,000 of these are severely distressed because of low occupancy, no tenant, repair costs.

Around 25.9% all investment properties and 51.3% of all mortgage properties are stressed. And on a state-by-state basis, as you could imagine, the most investor stress is in the Sydney and Melbourne markets or New South Wales and Victoria. As we see, there are 35% of investors, Victoria, 25% of investors, and even WA. The WA market has always been hurting since the end of the mining boom. So, a lot of stress coming through the system. And it’s hitting critical mass right now. So, Victoria is in lockdown. We’re looking at potentially a second wave, hopefully it’s contained within Victoria and they can just dampen what’s happening in New South Wales. But we’re kind of where Victoria was a week ago in New South Wales. A handful of cases trying to trace it, and hopefully it didn’t go much further, but that hotel was notorious for long distance truck drivers who could have taken it everywhere.

Jobseeker and jobkeeper are ending and at the same time, the insolvency ban is ending. So, we’re starting in our legal practice to have clients ringing up going, “Hey, I want to issue a statutory demand. One of my suppliers owes me money. I want to wind up their company. I couldn’t do it since March, but we know that September’s coming. So let’s sharpen our axe and start sewing.” So, people are becoming more and more litigious because that moratorium, that freeze on suing people and trying to get money out of them and bankrupt them is coming to an end. So, that sort of protection will be lifted. The government strategy is, we’ll, they’ll announce on the 23rd of July what they’re doing with jobkeeper and jobseeker, I’ll talk about that in a moment, but they’re also giving out tax dollars back to lower middle income earners.

So, Josh Frydenberg said the second $750 economic support payments, so that’s just if you’re on Centerlink, you just get a bonus, $750 that they’re saying we’ll put $3.8 billion injected into the economy. And hopefully those people will go out and spend it. Remember they don’t always spend it where the government wants. So, it’d be great if they went out and they supported retail and small business and the hospitality industry or tourism, but people can hoard it, people can buy it. Tattoos, like they did in the GFC, they’ll bought plasma televisions and tattoos, and it didn’t go where they wanted it to go within the economy. Westpac have forecasted and looked at the numbers. And what they’ve said is that they’re going to announce the changes to jobkeeper and jobseeker. We’ll see a third of $35 billion pushed into that, and it’s likely to be sectors that need it most. And it will have parameters and more restrictions and more monitoring on it, but it should go to hospitality, tourism.

Bit like home builders has propped up construction and building in Australia. So a further $15 billion stimulus package on top of that to help the failing economy. And Westpac economists have said this financial year alone, there’s going to be a likely deficit of $95 billion. They haven’t told us that. The budget’s not going to be announced until October, but what we’re seeing is a record already, a record budget deficit. So the closest we’ve come to this is post GFC where government spending drove up a debt. I remember that one under Kevin Rand of $54 billion, but we’re almost double that now at $95 billion. And they’re predicting in 2021, so next financial year, the deficit will reach $240 billion. So, off the Richter scale with government debt. That’s more than 12% of our GDP. That is huge. And it’s not just Australia. It’s the global economy. Every country in the world has been massively set back and turned on its head over all of this.

And Westpac’s initially forecasts were more favorable than that. So in other words, it’s $70 billion more than their worst estimate when this all started. So, those tax refunds also for low and middle income earners are coming through now that I mentioned earlier. We already had those last year, so they were introduced last financial year and it meant people got their tax returns in quickly and efficiently to get their benefit. So in 2019, $24.2 billion worth of refunds were given to taxpayers. If you’ve got a small business, you’ll know that you would’ve put it in before… Most people put it in April, may, and you got an offset. So, you didn’t have to pay tax but you got a benefit from it. And that was up 30% on the same period in 2018.

So, this side of the financial year, we can put in tax returns again, and people have done that. There’s been an 11% increase on lodgement from last year financially. So people are really under the pump trying to get every dollar that they can back in benefits. So 11% in lodgement up from this same time last year, but the reap tail spending didn’t lift. So, even though we all got tax concessions and everyone should have been better off, what it showed was in spite of the tax refunds, people didn’t go out and spend that money. But 4.3 million people will get the maximum benefit and about 10 million people. So nearly half our population will benefit for the low and middle income tax offset. Definitely in a time of crisis or change, famous quote from JFK that I love. He once said, “The Chinese have two brush strokes for the word crisis. One denotes danger, the other signifies opportunity.”

And he said, “In a time of crisis, be aware of the danger but don’t miss the opportunity.” Massive opportunity right now, but obviously danger. And there will be winners and losers in all of these. Businesses will close, people will lose their jobs. Other people will, from the level playing field and the change, they’ll get on board with change and they’ll be given huge opportunity. Darwin once said it’s not the strongest or the smartest who survive and thrive in times of change, it’s those who are most responsive or adaptive to that change. So, reverse it. If you’re ever sitting around thinking, “Oh, I wish I didn’t have to do this, or I wish it was different or wouldn’t it be a good idea if…” Write it down. There is so much opportunity right now. So many ideas. Innovation right now is being rewarded.

People who solve problems. In a time of change, those who can fill a need in the market, solve a problem are going to be rewarded. Markets reward those who fill a need, who solve a problem. So, I read an article the other day, people are doing side hustles. They’ve kept their day job or they’ve got whatever they used to do going on, but they’re saying, “You know what? There is a market here. There’s an opportunity here.” They’re creating businesses on the side. They’re calling this the fourth or the fifth industrial revolution, whichever way you look at it. We already had the infrastructure, so we live in the best time in history. If you heard Gary V on our Ignite live stream series the other week, he said, “If I had a time machine, fast forward it 100, 150 years. Give me a time machine and I could go back to any time in history for opportunity,” he said, “I would go to Australia in 2020. Land of opportunity and a time of disruptive change.”

So, in terms of ideas, business, Australia’s always been a nation of entrepreneurs and those who are willing to have a go. Those of you who joined another Ignite Series we had on the weekend, we had Bernard Salt. So, top Australian demographer and futurist. And he said, “Because of our immigrant background, our ties with… You’ve got to imagine the sort of person who comes to Australia, leaves the other side of the world, often doesn’t even speak the language and lands in a foreign country. Even the convict heritage that we have traveling all the way from England to this strange land, people land here and have to make a life out of a harsh environment.

Yes, we have bush fires all sorts of hardships, but people with true metal come and have a go here.” And that’s the [Anzac] spirit. That’s what our country’s built on. And Bernard Salt shared with us that Australians will rise from all of this. They’ll see the silver lining in the darkness and the opportunity. So we actually, and what Gary V was talking about when he said this time in history, 2020, it’s a unique time because we’ve had at least, since the last 20, 25 years, we’ve seen the age of communication. The digital age just boom. And it’s hit mainstream. Everyone, even eight year old kids are on TikTok. Everyone is digitally connected and we have different ways of communicating. And some of us, like me, I was a bit of a dinosaur. A clinging to the status quo. We haven’t made the move to the digital world like we should have.

And definitely my learnings from all of this where I always said, “No, no, no live event. People need to see you. You need to connect. I want to see people. I want to see an audience in front of me. I want to speak to 500 people. I can’t do it just to a camera.” But I’ve had to. And it was the push that we needed. So, a lot of industries are evolving the way we do things. I know that, for example, Mark Zuckerberg, for years has been pushing virtual reality. Why can’t you go and see a doctor in the US? Why can’t you just turn on a zoom call and say, “Here’s my symptoms. Here’s my rash.” Why can’t you get a prescription long distance? And we’ve always stuck to, “No, no, no. This is the way we’ve always done it. No, no, no. A doctor responsibly has to see people face to face.”

COVID has forced that sort of disruptive change. It’s bought speed and urgency to a market to make critical changes. So there’s huge possibilities. We already had the infrastructure there. It’s the guiding hand in the small of the back that we needed to get fast, effective change that people will adopt quickly. So, what could have taken 20 years to have a result or an outcome, people are now hungry for saying, “Give us some sort of virtual reality or some difference or some way of doing things so that we don’t have to leave our home.” It’s going to change the way we live, the way we work, everything. So your brain will be ticking away. It’ll be absorbing all of this change. Write down all your ideas.

I know that in our household and in our family, my kids are saying, “Wouldn’t it be good if you could order this or you could do that, or they would deliver this or whatever?” All those ideas shouldn’t just be wishful thinking. People had to invent things. The elevators didn’t always exist. It was somebody saying one day, “You know what? Wouldn’t it be good if you could just get in and it beamed you up to your floor and you didn’t have to take the stairs?” It starts with an idea and now is the time of disruptive change. Reticular activating system, or RAS as they call it, is part of our brain, that filters information for us. So what happens is so much data comes at you on a daily basis and by default, you just take the stuff that’s relevant to you. We actually have part of our brain that is so powerful, it can go and find information and data that we need, especially when we calibrate it.

When we need to be resourceful, we can say to our brain, “You know what? I’ve got a problem.” Albert Einstein once said, “I’m not smarter. It’s not that I’m smarter or better than other people, I just stick with problems for longer.” In other words, sit with your problem, focus on it. And an outcome or a solution will come to you. Your brain will find the information you need. A great example of the reticular activating system is if you’ve gone to buy a new car. And you’ve gone into a car yard and you’ve chosen a Hyundai in a certain color, and then you think you’re cutting edge. “I just got that color because I liked it and I like the boot and I liked the seven seats or whatever.” And then suddenly every other car on the road is your color, you’re make your model. And you think they’re copying you because you’re a trendsetter. But it’s just that your reticular activating system has filtered.

Of all the millions of bits of data that if it came at you at once, would short-circuit you. It said, “You know what? Cars are relevant. If you’re choosing a house, you’ll notice carpet on the floor, or paint, if you’re renovating or that sort of thing.” What is relevant to you at any given time, what you focus on becomes your reality. That’s why they say, “You are what you focus on.” Your focus and your perception becomes your reality. Or Napoleon Hill who wrote Think and Grow Rich, greatest book ever written and responsible for making more millionaires than any other text ever written said, “Don’t wait. The time will never be right. Don’t say when I’ve got money, when I leave my job, when I retire, when this, when that. Start where you are and start with what you have. Whatever you have at your disposal now, just start. Because better things, opportunities, more tools, people, connections, introductions will come to you as you go.”

The important thing is to form the commitment and the intent and say, “Okay, this is what I’m going to do. I’ll just do the next step and the next step.” Martin Luther King once said, “You don’t need to see the whole staircase. Only the next step.” So, if we take a glass half full approach and say, “Yep, there is going to be [inaudible] on the streets,” that it is a level playing field. It’s reducing barriers to entry and it’s equalizing. It’s a great leveler when it comes to opportunity. Where’s your opportunity? And you can hunker down in the fetal position and hope that it all goes away and put your head in the sand, or you can embrace it. As Bernard Salt said, “As a nation of entrepreneurs and people who will have a go, where’s the opportunity and what’s the difference it can make.”

You’ve been following my series that we’ve had, our Ignite Series, I’m looking for the best global minds. And that’s one of the benefits. I can reach out to thought leaders in the world who I never could have brought here to educate us all. Knowledge is power. I could never have flown some multi multimillionaire billionaire out to Australia to come and speak to us live. But they’re all in lockdown. They’re twiddling their thumbs. They’re happy to share their knowledge. And it’s not the trip to Australia anymore, they can come live and share with us. So, given the nature and the current entrepreneurial environment that’s right for opportunity, and this is literally the pre-release of the pre-release of first heads up of our next Ignite Live Stream, which is going to happen on the 25th of July.

So, in a couple of weeks time, I’m bringing the top business minds to you. So, business Titans. We’re going to hear from top marketers like Jay, Abrahams and Seth Godin. Sales and marketing are the lifeblood of any business. They will fix a multitude of problems. You can have the best product, the best business in the world, if no one knows about it, there’s no point. And given the rising tide of distressed businesses, the quickest way for a turnaround and to fix things is via sales and marketing. But we don’t know what we don’t know. And that’s why we want to gain knowledge. So, I reached out to those top experts and others like them. And in our business Titans live stream on the 25th, we’re going to look at opportunity. Whether you’re currently a business owner, whether you’re unemployed now, because of this, this could be the opportunity you’re looking for. How to get into your own business, have more control and raise your sales and marketing and go through the roof in a time of opportunity and disruptive change.

So, head over there now. You’re the first people to know about this, and register for that. And we’ll look forward to bringing those experts to you on the 25th of July. Otherwise, in the meantime, stay safe, take care, be kind to one another. And if you’re on new YouTube, don’t forget to hit the like button right now, subscribe to our channel, click the bell button, and we’ll notify you every time we upload a new video.

And don’t forget to tag your friends in the comment section and follow us as well on Facebook. And we’ll be giving you much more content. And engage. Engage with us. Leave comments for me below. What do you want more of? What do you want less of? Feedback is the breakfast of champions. I don’t know what I don’t know. And I want to be able to empower you with knowledge and bring you the knowledge that I don’t have because I want a ripple effect. So, who would you like to hear from? What sort of information are you hungry for? Get interactive and let us know. And we’d only be too happy to facilitate. Take care and we’ll talk soon.

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