‘Going to get worse before it gets worse’: Kohler sees light at the end of a challenging year

Despite expectations of a challenging year ahead for homeowners and investors, veteran journalist and business commentator Alan Kohler sees some light at the end of the tunnel.

Speaking at an exclusive economic update hosted by diversified financial services group Finexia Financial (ASX: FNX), Kohler warned that financial markets are factoring a US recession as a near certainty this year, while domestically the key challenges for the Australian economy remain cost-of-living pressures and housing affordability.

“It’s a really big deal what’s happened to house prices in this country,” Kohler says. “Sydney is the second least affordable city in the world. Even on a world basis, Australian cities are horrendously expensive.”

As for the housing shortage that is impacting residential vacancy rates, Kohler adds that ‘it’s only going to get worse before it gets worse’.

Kohler sees the root cause of the inflation crisis facing the Australian economy as the Reserve Bank’s decision to keep interest rates at record lows for much longer than it should have during the COVID pandemic. With rates now on the rise, the self-confessed eternal optimist is forecasting a difficult 2023 ahead.

“Every time interest rates go up, particularly rapidly, something breaks,” he says. “There is a crisis of some sort.”

Kohler says the change in outlook has occurred in recent months, led by the collapse of Silicon Valley Bank earlier this year, which he says has seen at least one forecaster making the call on a US recession as a certainty.

“When there is a banking crisis, banks stop lending and this has exacerbated rising interest rates to the point where it’s made a recession virtually certain,” Kohler says.

However, Kohler sees the Australian economy at a crossroads with a couple of positives balancing out the negatives.

“Inflation has peaked, there are signs of a weakening Australian economy, but the labor market remains strong,” he says. “There are labour shortages everywhere.”

While the futures market is predicting no more rate hikes for Australia, some experts are now factoring a drop in interest rates. Whether that occurs, Kohler agrees that the RBA was right to pause its rate rising cycle this month to examine the impact of successive increases in the cash rate on the economy over the past 12 months.

Among Kohler’s concerns is the risk that more Australian households will suffer negative cashflow this year once their home loans come off low fixed-rate mortgages and revert to higher variable rates.

However, Kohler has emphasised the business and investment opportunities presented by renewables and climate change, which he expects to be the number one ‘investment and social obsession’ of the next 10 years.

He forecasts opportunities emerging in areas such as lithium and other new materials that will power electric vehicles in future.

Kohler also has addressed the importance of government-supported services, such as aged care and childcare, amid the cost-of-living pressures facing Australian households.

“Childcare is becoming a government-supplied product using private capital,” Kohler says. “It’s kind of the same as aged care – it’s so regulated and so subsidised that you have to see it as a government service that uses private capital.”

Kohler is expecting that a Productivity Commission and ACCC inquiry into the childcare sector will result in more support for the industry.

“It’s such an essential service now that the inquiries will almost certainly come up with solutions that involve more government (support) of some sort.

“The need for more female participation in the workforce is clear. On its own, that makes it an essential service. There needs to be more childcare centres not fewer (and) they need to be supported by the government.”

Finexia managing director Neil Sheather says Kohler’s views on the childcare sector affirmed his company’s support for the industry through the Finexia Childcare Income Fund.

The $55 million fund, which has just closed out its first round of funding, was founded to support the development of new childcare centres nationally. It also taps into a niche market that Sheather says has been largely abandoned by the banking sector.

"We launched the second round of funding this week for the Finexia Childcare Income Fund due to the strong support we experienced in the first round. The current pipeline will see the fund at $100 million of childcare assets under management by the end of this calendar year," Sheather says.

“The childcare sector is best described as recession resistant and that’s being recognised by investors. As an essential service, and from an investor’s point of view trying to keep ahead of inflation, the fund is returning 9.25 per cent return in the form of a monthly cash distribution.

“On the other side of the equation, with bank finance harder to secure, we are supporting the growth of the childcare sector by providing the short-term finance needed by experienced childcare operators who are developing centres. The fund gives these operators the opportunity to develop more centres and increase and stabilise their occupancy before they seek traditional bank finance.”