Q+A: “This cannot be a crisis. It’s got to be a cycle”

Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Sean Aylmer. Private credit investors have hit the headlines lately after the collapse of Sydney property developer Bathlow Group. Private credit has grown rapidly in Australia, attracting both local investors and increasing amounts of global capital. But the property market it's lending into is changing, and the latest developments demonstrate some of the risks. Today, I want to take a closer look at real estate private credit, how investors are navigating the current environment and where the sector is heading. Remember, this is general information only, and you should seek advice tailored to your circumstances before making investment decisions. Alan Greenstein is CEO and co-founder of Zaga, a great supporter of Fear and Greed. Alan, welcome back to Fear and Greed Q&A. Thank you, Sean. Pleasure to be here. Is it a crisis or is it just a cycle, normal part of investing?

I don't think it's a crisis at all. Normally in a crisis, you would see a complete absence of liquidity. We're certainly not seeing an absence of liquidity yet. You would see carnage across the market. We're not seeing carnage across the market. I think property prices in Sydney are down 7% off their peak. 7% cannot be a crisis. According to most of the economists, the economy is still moving forward. It may be moving forward a lot more slowly than it was. Consumers are still spending. Apparently, household spend is up $1,000 a month for the last three months. Lots of business still running. The economy is still running. So this cannot be a crisis. It's got to be a cycle.

So explain how these cycles work in layman's terms. You just have periods where there's all good news and then you have the baffler and other parts of the sector which aren't performing as well. And are people sort of jumping on that? And that's just sort of the down cycle. Is that how it works?

Yeah, it's a good question. I'm not an economist, so I'll just give an answer from my point of view, having been in these markets for around 40 years. And I think that the late, great J.P. Morgan, I think, was quoted as saying, when the lift boy gets in, I get out. And that was relative to investing in equity markets. And what he was really saying is, look, when the man in the street is coming into the market… the market is getting overheated and it's time to get out. I actually think that this particular situation has really been caused by inflation increasing. So we've had constant upticks in inflation. That has done two things. Interest rates have gone up. So borrowing costs are more expensive, both for the developers and for the people owning their homes. We've got supply chain issues. We've got the government spending a lot of money. So we've got an inflationary environment. Against that, fiddling with the tax system has definitely taken a lot of steam out of the market. I don't think there's any other way to call it. I'm not suggesting that those changes are good, bad, or otherwise. Just it has caused a tremendous amount of concern, uncertainty, and that has caused people to sit on their